Question

The I. Swiatek Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model foryears; the deluxe model was introduced recently to tap a new segment of themarket. Since the introduction of the deluxe model, the company's profitshave steadily declined, and management has become increasingly concernedabout the accuracy of its costing system. Sales of the deluxe model have beenincreasing rapidly.

The current cost accounting system allocates manufacturing support

costs to the two products on the basis of direct labor hours. The company has

estimated that this year it will incur $1 million in manufacturing support

costs and will produce 5,000 units of the deluxe model and 40,000 units of

the regular model. The deluxe model requires 2 hours of direct labor, and the

regular model requires 1 hour. Material and labor costs per unit and selling

price per unit are as follows:

ITEM DELUXE REGULAR

Direct materials cost $45 $30

Direct labor cost $20 $10

Selling price 140 $80

Required:

4a. Compute the manufacturing support cost driver rate for this year.

4b. Determine the cost to manufacture one unit of each model.

4c.The company has decided to trace manufacturing support costs to four activities.

Following are the amount of manufacturing support costs traceable to the four activities

this year:

COST DRIVER UNITS

ACTIVITY COST DRIVER COST TOTAL DELUXE REGULAR

Purchase orders Number of orders $180,000 600 200 400

Quality control Number of inspections 250,000 2,000 1,000 1,000

Product setups Number of setups 220,000 200 100 100

Machine maintenance Machine hours 350,000 35,000 20,000 15,000

$1,000,000

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Compute the total cost to manufacture one unit of each model.

4d. Compare the manufacturing activity resources demanded per unit of the regular model

and per unit of the deluxe model. Why did the old costing system under-cost the deluxe

model?

4e. Is the deluxe model as profitable as the company thinks it is under the old costing system?

4f. What should the I. Swiatek Company do to improve its profitability? Consider pricing and product-level changes among your suggestions. Who should be involved in implementing your recommendations?