Dudu company manufactures two products: Dotan and Topaz. The market price for Dotan is $40 and for Topaz is $8. The demand for Dotan is highly uncertain, and the product spoils within two days. For that reason, Dudu decided to make Dotan only on demand, and use the excess capacity for the manufacturing of the less profitable Topaz. The production process utilizes a machine that can be used for the production of either product at any particular point in time. Practical capacity is 2,500 machine hours. To manufacture one unit of either Dotan or Topaz takes one machine hour. Switching production between the two products involves a set-up cost of $50. The variable cost per unit of Dotan is $15 and of Topaz is $5. Dudu estimates demand of 500 units for Dotan (produced in 100 different set-ups) and can sell any quantity produced of Topaz.

Given the above estimations, Dudu can use one of the following production plans:

(i) Produce 500 units of Dotan (one set-up is required).

(ii) Produce 2,500 units of Topaz (one set-up is required).

(iii)Produce 500 units of Dotan and 2,000 units of Topaz (200 set-ups are required).

Questions:

A. Assume Dudu currently uses production plan (iii), and allocates all overhead (including setup costs) based on machine hours. Find the cost per unit under this production plan. If Dudu uses (only) this traditional costing system to decide if plan (iii) is desirable, will he consider changing his production plan? Explain.

B. Just before reacting to the results of A, Dudu had attended a seminar describing “Activity Based Costing,” and realized that set-up costs should be allocated based on the number of set-ups. Find the cost per unit under production plan (iii) if Dudu adopts ABC. If Dudu uses (only) an ABC system to decide if plan (iii) is desirable, will he consider changing his production plan? Explain.

C. What is the most profitable alternative? Show in detail.

D. What is going on? Is the ABC idea flawed? Why or why not.

Answer rating: 100% (QA)

Plan A Plan B Plan C Particulars Dotan Topan Total Particulars Dotan Topan Total Particulars Dotan T... View the full answer