Our company makes and sells consumer devices that use ultraviolet (UV) radiation to disinfect phones, tablets,...

 

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Our company makes and sells consumer devices that use ultraviolet (UV) radiation to disinfect phones, tablets, laptops, and other small- and medium-sized items. We offer three products: - Phone Wash, for disinfecting small gear, sold for $75 per unit3; - Travel Wash, sold for $100 per unit. Similar to the Phone Wash, but with a rechargeable battery; - Home Wash, sold for $150 per unit. These are large enough to disinfect most laptops. Our products were introduced in 2018. Sales greatly exceeded expectations in 2020; consequently, we doubled our manufacturing capacity for 2021. While 2021 saw additional sales increases, our manufacturing capacity exceeds current demand. All three products are made at a single production facility, in a single automated production line. Switching production between a batch of one product and a batch of another product requires setting up and testing the production line. We have been using an activity-based costing (ABC) system to compute our unit costs. This system incorporated the hierarchy of costs, but with only two levels: unit-level and batch-level. (Batch-level costs are primarily for setups. Product-level and Sustaining-level costs were immaterial.) Overhead (OH) rates in the ABC system were computed at the beginning of each year using estimated units and estimated batches. In May 2021, the CFO asked the accounting team to explore the possibility of changing our internal reporting in one of two possible ways. First, the CFO asked that we consider using variable costing. Second, the CFO asked us to investigate continuing the ABC absorption system, but with practical capacity. Estimated 2021 unit and batch costs using our current ABC system, the ABC system with practical capacity, and variable costing are below (along with some additional data): 2021 Estimates: Phone Wash Travel Wash Home Wash Units made and sold 900,000 450,000 120,000 Average batch size Number of batches 3,000 1,000 1,000 300 450 120 Unit-level cost per unit: current ABC system Unit-level cost per unit: variable costing Unit-level cost per unit: ABC with practical capacity $58 $42 $71 $51 $61 $123 $89 $50 $106 Batch-level cost per batch: current ABC system Batch-level cost per batch: variable costing Batch-level cost per batch: ABC with practical capacity $990 $550 $880 $1,100 $640 $985 $1,300 $760 $1,165 What is our total estimated cost of excess capacity in 2021? Our company makes and sells consumer devices that use ultraviolet (UV) radiation to disinfect phones, tablets, laptops, and other small- and medium-sized items. We offer three products: - Phone Wash, for disinfecting small gear, sold for $75 per unit3; - Travel Wash, sold for $100 per unit. Similar to the Phone Wash, but with a rechargeable battery; - Home Wash, sold for $150 per unit. These are large enough to disinfect most laptops. Our products were introduced in 2018. Sales greatly exceeded expectations in 2020; consequently, we doubled our manufacturing capacity for 2021. While 2021 saw additional sales increases, our manufacturing capacity exceeds current demand. All three products are made at a single production facility, in a single automated production line. Switching production between a batch of one product and a batch of another product requires setting up and testing the production line. We have been using an activity-based costing (ABC) system to compute our unit costs. This system incorporated the hierarchy of costs, but with only two levels: unit-level and batch-level. (Batch-level costs are primarily for setups. Product-level and Sustaining-level costs were immaterial.) Overhead (OH) rates in the ABC system were computed at the beginning of each year using estimated units and estimated batches. In May 2021, the CFO asked the accounting team to explore the possibility of changing our internal reporting in one of two possible ways. First, the CFO asked that we consider using variable costing. Second, the CFO asked us to investigate continuing the ABC absorption system, but with practical capacity. Estimated 2021 unit and batch costs using our current ABC system, the ABC system with practical capacity, and variable costing are below (along with some additional data): 2021 Estimates: Phone Wash Travel Wash Home Wash Units made and sold 900,000 450,000 120,000 Average batch size Number of batches 3,000 1,000 1,000 300 450 120 Unit-level cost per unit: current ABC system Unit-level cost per unit: variable costing Unit-level cost per unit: ABC with practical capacity $58 $42 $71 $51 $61 $123 $89 $50 $106 Batch-level cost per batch: current ABC system Batch-level cost per batch: variable costing Batch-level cost per batch: ABC with practical capacity $990 $550 $880 $1,100 $640 $985 $1,300 $760 $1,165 What is our total estimated cost of excess capacity in 2021?

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