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 $104 per machine hour. Production information follows.

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.

The firms total overhead of $10,410,400 is subdivided as follows: manufacturing setups, $2,271,360; machine processing, $6,246,240; and product shipping, $1,892,800. 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 $298.50 and the marketing manager is contemplating a $36 discount to stimulate volume. Is this discount advisable?

Anticipated volume (units) Direct-material cost per unit Direct-labor cost per unit Type A 20,800 $ 20 25 $ Type B 39,000 $ 30 25 NW Setups Machine hours Outgoing shipments Type A 124 41,600 200 Type B 84 58,500 150 Total 208 100,100 350 Required 1 Required 2 Required 3 Required 4 Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company's current overhead costing procedures. Type A Type B Unit manufacturing costs Required 1 Required 2 Required 3 Required 4 Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing. (Round activity based application rates, overhead application and the final answers to 2 decimal places.) Type A Type B Unit manufacturing costs Required 1 Required 2 Required 3 Required 4 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? (Do not round intermediate calculations. Round activity based application rates, overhead application and the final answers to 2 decimal places.) Type A store cabinet line is understated Required 1 Required 2 Required 3 Required 4 Assume that the current selling price of a Type A storage cabinet is $298.50 and the marketing manager is contemplating a $36 discount to stimulate volume. Is this discount advisable? OYes No