Paris Custom Tanks (PCT) designs and manufactures stainless steel tanks. For planning purposes, John Connolly, PCT general manager, classifies PCT products into three groups: 

1. The basic tank with small cosmetic variations 

2. Size modifications of the basic tank 

3. Fully customized tanks 

Although PCT sales have been increasing, total margins have been declining steadily—a matter of considerable concern for John. John finds this particularly perplexing since sales of the high-priced fully-customized tanks have occupied an increasing share of the product mix. 

John uses a standard pricing formula that is common in the segment of the industry that PCT occupies. The pricing formula is to set price equal to 125% of computed product cost. Because the cost of the stainless steel used in each tank is the major component of total cost, the current costing system sets each product’s total cost equal to 150% of the tank’s steel cost. The value chain for the tanks is as follows: 

1. The company’s basic tank has a 1,000 gallon capacity. 

2. Tank production is highly automated. 

(a) A computer controls the machine that cuts sheets of stainless steel into the pieces needed to make a particular tank. 

(b) Then, another computer controlled machine bends the steel into shape and automatically makes any needed welds. 

(c) Finally, any external fittings are hand welded onto the tank.

3. For tanks other than the basic tanks, plans have to be drawn up to meet the customer’s requirements. A technician then uses the PCT CAD/CAM machine to render the drawings into the software to control the machines that will make the tank. 

Because the drawings for each machine specify the amount of steel used in the machine, the steel used in each machine is readily known for costing purposes. Although machines control most of the tank manufacturing, there is some labor relating to attaching fixtures that cannot be welded by the machine-controlled welding robots. The four major plant activities are product design, material handling, manufacturing, and finishing. Each of these activities uses different amounts of the following resources, which are all fixed in quantity and cost:  

The factory accountant prepared the following information for each of the three product groups. The amounts shown for the size-modified basic tanks and the customized tanks are averages.

Required 

(a) What is each product’s cost using the current costing approach?

(b) What is each product’s cost using the TDABC approach? 

(c) Why are profits falling as volumes increase? What suggestions could you give to the top management to help improve the company’s profitability? 

(d) If current production is 250, 150, and 135 units of the basic tank, the size-modified basic tank, and the custom tank, respectively, what will be the reported profit under the current system, where each product’s price is set equal to 125% × 150% × the product’s steel cost? 

(e) Using the same production mix as in part (d), what will be the reported profit under the TDABC approach where each product’s price is set equal to 125% times the TDABC product cost?  

Transcribed Image Text:

RESOURCE Labor CAD/CAM (machine and operator).. Manufacturing machine time Other manufacturing overhead resources HOURS AVAILABLE 18,000 3,200 600 8,000 TOTAL COST $ 540,000 $1,280,000 $ 750,000 $1,200,000