Harvey Company produces two models of blenders: the Super Model (priced at $400) and the Special Model

Harvey Company produces two models of blenders: the €œSuper Model€ (priced at $400) and the €œSpecial Model€ (priced at $200). Recently, Harvey has been losing market share with its Special Model because of competitors offering blenders with the same quality and features but at a lower price. A careful market study revealed that if Harvey could reduce the price of its Special Model to $180, it would regain its former share of the market. Management, however, is convinced that any price reduction must be accompanied by a cost reduction of the same amount so that per-unit profitability is not affected. Earl Wise, company controller, has indicated that poor overhead costing assignments may be distorting management€™s view of each product€™s cost and, therefore, the ability to know how to set selling prices. Earl has identified the following overhead activities: machining, inspection, and rework. The three activities, their costs, and practical capacities are as follows:

The consumption patterns of the two products are as follows:

Harvey assigns overhead costs to the two products using a plantwide rate based on machine hours.
Required:
1. Calculate the unit overhead cost of the Special Model using machine hours to assign overhead costs. Now, repeat the calculation using ABC to assign overhead costs. Did improving the accuracy of cost assignments solve Harvey€™s competitive problem? What did it reveal?
2. Now, assume that in addition to improving the accuracy of cost assignments, Earl observes that defective supplier components are the root cause of both the inspection and rework activities. Suppose further that Harvey has found a new supplier that provides higher quality components such that inspection and rework costs are reduced by 50 percent. Now, calculate the cost of the Special Model (assuming that inspection and rework times are also reduced by 50 percent) using ABC. The relative consumption patterns also remain the same. Comment on the difference between ABC and ABM.

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Activity Cost Machining Inspection Rework $5,400,000 3,600,000 1,800,000 Practical Capacity 90,000 machine hours 45,000 inspection hours 45,000 rework hours Units Machine hours Inspection hours Rework hours Special 100,000 50,000 10,000 7,500 Super 30,000 40,000 35,000 37,500