Molded luggage is one of the main product lines for the Traveler Corporation. Traveler uses large molding machines to press a specially formulated chemical compound into metal molds corresponding to different suitcase sizes and shapes. The molded product is then trimmed, lined with fabric, and fitted with accessories such as locks and hinges before being packed and shipped.
The following data pertain to setting up one of the molding machines, which costs $40,000 per year.

Required:
a. Suppose Traveler allocates setup costs to products by using the number of setups as the allocation basis. What is the setup cost allocated to each product?
b. Suppose Traveler allocates setup costs to products using the total number of setup hours as the allocation basis. What is the setup cost allocated to each product?
c. Why do your answers for requirements (a) and (b) differ? What condition is necessary for the two answers tocoincide?

Transcribed Image Text:

Number o Total Number of Setups perHourspe Setup Hours for Product (Suitcase Type) 24" Two-suite 26" Three-suiter 30"Jumbo Wheeler Total Year Setup 14 18 26 n/a the Year 98 36 26 160 10