Now, managers are considering about activity-based costing system, and have gathered the following information about the expected manufacturing overhead costs for next year. Assume annual product and sales volume remains the same for future years.

Table 3. Information for Activity- based Costing System

		Units of the cost driver
Activity Centers & Cost Drivers	Costs	Product A	Product B
Center 1 (number of rooms)	$900,000	300,000	1,200,000
Center 2 (number of shipments)	$800,000	4,800	15,200
Center 3 (number of inspections)	$1,200,000	21,000	59,000
Center 4 (number of orders)	$800,000	110,000	50,000
Center 5 (number of hours)	$100,000	16,000	176,000
Center 6 (number of set-ups)	$1,000,000	4,000	6,000

 

Panel A. Labor usage for Product A and Product B   Product A                    Product B
Direct labor I hours	3.5	1.5
Direct labor I cost / hour	$20	$20
Direct labor II hours	4	8
Direct labor II cost / hour	$30	$30

 

Part A.

(1) Assign the per unit and total overhead costs to each product, based on activity-based costing system. (8 points) (2) Calculate the per unit and total manufacturing costs for each product based on activity-based costing system. (4 points)

Part B.

Based on the overhead costs assigned using activity-based costing system, (1) Re-prepare the income statement, using the format in Table 2 and assuming the same selling and admin expenses. (6 points) (2) Calculate the profit margin ratio (i.e., profit margin / sales) and net profit per unit, and compare the profitability of the two products (4 points). (3) Based on your calculations, update your suggestions to the managers (3 points)

Table 2. Company X Income Statement 2019

Income Statement
Year Ended Dec. 31, 2019
	Product A	Product B	Total
Sales (4,000 * $1,260 each); (22,000 * $900 each)	$5,040,000	$19,800,000	$24,840,000
Less: Cost of Goods Sold ($940*4,000); ($720 * 22,000)	($3,760,000)	($15,840,000)	($19,600,000)
Gross Margin	$1,280,000	$3,960,000	$5,240,000
Less: Selling and administrative expenses	($780,000)	($264,000)	($1,044,000)
Net Profit (a)	$500,000	$3,696,000	$4,196,000
Units produced and sold (b)	4,000	22,000
Net Profit per unit (a / b)	$125	$168