Franklin Furniture, Inc. (FFI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedside table) for use in motels and hotels. FFI has three customer groups, which it calls the value, quality, and luxury groups. The value products are targeted to low-price motels that are looking for simple furniture, while the luxury furniture is targeted to the very best hotels. The value line is attractive to a variety of hotels and motels that appreciate the combination of quality and value. Currently there has been a small increase in the low-cost and value lines, and an appreciable increase in demand in the luxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand for business travel, while a few years ago, the value segment was the most popular for business travelers. FFI wants to be able to respond to the increased demand with increased production but worries about the increased production cost and about price setting as its mix of customers and production change. FFI has used a volume-based rate based on direct labor hours for some time. Direct labor cost is $15 per hour

The budgeted production data for the three product lines follow.

Required (Round all rates to two decimal places)
1. Determine the cost per set and the total production cost of each of the three customer groups using activity-based costing.
2. Determine the production cost for each of the three customer groups using FFI's current volume-based approach.
3. The activity usage data given in the problem reflects current usage of the various cost drivers to manufacture the firm's product lines. Suppose you are given the following information regarding the firm's practical capacity for each of these activities, as follows:

Comment on how you would use this additional information for costing the fi rm's products and assisting in strategic planning.
4. Compare the two approaches and discuss the strategic and competitive issues of using each of the two methods.

Budgeted Cost 349,600 160,000 216,000 1,750,000 619,500 290,400 $3,385,500 $5,000,000 Cost Driver Materials handling Product scheduling Setup labor Automated machinery Finishing Pack and ship Number of parts Number of production orders Number of setups Machine hours Direct labor hours Number of orders shipped General, selling, and adm. costs Product Lines Value Quality Units produced Price Direct materials cost per unit Number of parts per unit Direct labor hours per unit Machine hours per unit Production orders Production setups Orders shipped Number of inspections 15,000 $650 5,000 $900 S50 50 600 $1,200 $110 120 30 50 20 1,000 70 50 2,000 200 300 14 Cost Driver Practical Capacity Number of parts Number of production orders Number of setups Machine hours Direct labor hours Number of orders shipped 990,000 800 200 123,900 5,000