The new president of the Blake Company was stumped. Why had profits gone down? He had directed the sales department to push the product with the highest contribution margin, and the sales department had come through 

with flying colors. The percent of flops sold had increased from 25% of units sold to 37.5% of units sold. So what happened?

 

FlopsChopsSales Price per Unit$200$600Direct Materials per Unit$100$300Direct Labor Cost per Hour$30$50Direct Labor Hours per Unit2 hours per unit6 hours per unit Number of Units Produced30,00020,000

The variable overhead for the coming year is estimated to be $ 4,900,000.

1. Calculate the Blake Company's estimated direct labor hours to produce flops and chops.
2. Calculate the predetermined variable overhead rate that will be used in the coming year using a traditional costing system based upon direct labor hours.
3. Using a traditional costing system based upon direct labor hours, compute the using product costs for flops and chops as well as contribution margin per unit.
4. It has been suggested to the president to consider the use of an ABC costing system to allocate manufacturing overhead. Engineering studies have revealed the following information about estimated manufacturing activities for 
5. the coming year.
 
6. Activity Cost Pool Estimated Overhead Cost Expected Activity LevelSetups$860,000200 setupsScrap$400,000500 unitsTesting$300,0005,000 tests Machine Related$2,400,000100,000 machine related Total$4,000,000
8. Calculate the separate predetermined overhead rates for each of the activities listed above.
9. The following data are available about the activity levels needed to produce the projected 30,000 units of flops.
10. Activity Cost Pool Estimated Activity Level for FlopsSetups50 setupsScrap200 unitsTesting2,000 tests Machine Related12,500 machine related
11. Calculate the expected variable overhead to be applied to flops.
12. The following data are available about the activity levels needed to produce the projected 20,000 units of chops.
13. Activity Cost Pool Estimated Activity Level for GadgetsSetups150 setupsScrap300 unitsTesting3,000 tests Machine Related87,500 machine related
14. Calculate the expected variable overhead to be applied to chops.
15. Calculate the total overhead (total for company) that is expected to be applied to flops and chops.
16. Calculate the projected unit costs and unit contribution margins for flops and chops using ABC costing.
17. What conclusions can you draw about the use of traditional costing versusABC costing for the Blake Company? What recommendations do you have for the president?