Leisure Time manufactures two models of bicycles, Road Bike and Mountain bike. Road bikes sell to retailers
Question:
Leisure Time manufactures two models of bicycles, Road Bike and Mountain bike. Road bikes sell to retailers for $475 per bike. Mountain bikes sell to retailers for $525 per bike. Due to changes to add electric bikes to production the company may have to discontinue the least profitable product (either mountain or road bike). Leisure has always used a plant-wide manufacturing rate.
Direct labour hours are used to allocate the overhead to each product:
Road | Mountain | |
Number of units produced and sold | 10,000 | 12,500 |
Direct materials per unit | $80 | $120 |
Direct labour per unit | $75 | $85 |
Activity Cost Pool | Budgeted Overhead Costs | Cost Driver | Cost driver Budgeted Level | |
Road | Mountain | |||
Cutting | $2,400,000 | Number of pieces | 80,000 | 120,000 |
Spraying | $ 660,000 | Number of bikes | 10,000 | 12,000 |
Assembly | $1,600,000 | Direct labour hours | 50,000 | 50,000 |
Total | $4,660,000 |
a. Compute the plantwide rate.
b. Using the plantwide rate allocate overhead to each product.
c. Calculate the budgeted profitability for each unit of the two models, using plantwide rate. What product do you suggest should be discontinued?
d. Compute overhead rates for each cost pool using activity-based costing and allocate to each product?
e. Calculate the budgeted profitability for each unit of the two models using the activity-based-costing (ABC) method. What product do you suggest should be discontinued?
f. Provide two reasons a company prefer using an ABC system and two reasons to use a plantwide allocation rate?
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds