Problem 5-49 Activity-Based Costing; Product Promotion (LO 5-1, 5-2, 5-4, 5-5)

Maxey & Sons manufactures two types of storage cabinetsType A and Type Band applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		24,000			45,000
Direct-material cost per unit	$	28		$	42
Direct-labor cost per unit		33			33

The controller, who is studying the use of activity-based costing, has determined that the firms overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities three respective cost drivers, follow.

	Type A			Type B			Total
Setups		140			100			240
Machine hours		48,000			67,500			115,500
Outgoing shipments		200			150			350

The firms total overhead of $13,860,000 is subdivided as follows: manufacturing setups, $3,024,000; machine processing, $8,316,000; and product shipping, $2,520,000.

Required:

1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the companys current overhead costing procedures.

2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing.

3. Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?

4. Assume that the current selling price of a Type A storage cabinet is $360.00 and the marketing manager is contemplating a $40 discount to stimulate volume. Is this discount advisable?