1. Wow! is that Red-92 model ever a loser! It's time to cutback it's production shift our resources toward new Terry-95 model, Garry Taylor, executive vice-president of Taylor Products Inc. "Just look at the this income statement I've received from accounting. Terry-95 is generating over eight times as much as profit as Red-92 one-sixth of unit sales. I'm convinced that our future depend on the Terry-95. The year-end statement Thomas was referring is shown below. Sales S S Total Model Red-92 Terry-95 11,125,000 9,000,000 2,125,000 6,900,000 $ 5,490,000 1,410,000 4,225,000 $ 3,510,000 715,000 3,675,000 3,450,000 225.000 550,000 $ 60,000 $ 490,000 Is 30,000 $ 5,000 Cost of Goods sold Gross Margin Less: Selling and Administrative Expenses Operating Income IS No. of units produced IS "The numbers sure look that way", replied Judy Walker, the company's sales manager. "But why isn't competition more excited about T-95? I know we've been producing the model only for three years, but I am surprised that more of our competitors haven't recognized what a cash cow it is." "I think it's our new automated plant", replied Taylor. "Now it takes only two direct labour-hours to produce a unit of the Red- 92 and three direct labour-hours to produce a unit of the Terry- 95. That's considerably less than it used to take us. "I agree that automation is wonderful", replied Walker. "I suppose that's how we're able to hold down the price of T-95. Turner Company in England tried to bring out a Terry-95 but "I agree that automation is wonderful", replied Walker. "I suppose that's how we're able to hold down the price of T-95. Turner Company in England tried to bring out a Terry-95 but discovered they couldn't touch our price. But Turner is killing us on the Red-92 by undercutting our price with some of our best customers. I suppose they will pick all of our Red-92 business if we move out of that market. But who cares? We don't have to advertise T-95; it just seems to sell itself." "My only concern about automation is how our manufacturing OH rate has shot up", replied Taylor. "But I think we've got a problem in production. Our total manufacturing OH cost is $2,700,000. That comes out to be a hefty amount per direct labour-hour, but Diana down in accounting has been using direct labour-hour as the base for computing overhead rates for years doesn't want to change. I don't suppose it matters as long as costs get assigned to the products". "I've never understood that debit and credit stuff, replied Walker. "But I think we've got a problem in production. I had lunch with Jenny, our plant manager, yesterday and she complained about how complex T-95 to produce". Apparently, they have more work to with more machine setups, special soldering and also have to inspect each unit." "It will have to wait", said Taylor. "I am writing a proposal to Board of Directors to phase out R-92. We've got to increase our bottom line or we'll all be looking for jobs". 2. Implementing an ABC system should proceed only if management believes the benefits of doing so will exceed the costs. The costs of an ABC system are not difficult to quantify. They include identifying the key activities, developing an information system to record and report information, collecting data for activity measures, and maintaining the system. More difficult to quantify are the benefits of adopting an ABC system. Required: Can you identify some qualitative benefits of adopting ABC? Can any of these be quantified? How could management deal with uncertainty related to any potential benefits of adopting an ABC system