Sippican Case Questions: Exhibit $3$ Product Data

$\backslash$table$[[$Product Lines,Valves,Pumps,Flow Controllers$],[$Materials per unit,$\backslash$table$[[\backslash$table$[[4$ components$],[2$@$$2=$$$4],[2$@$6=12]]]],\backslash$table$[[\backslash$table$[[5$ components$],[3$@$$2=$$$6],[2$@$7=14]]]],\backslash$table$[[\backslash$table$[[10$ components$],[4$@$$1=$$$4],[5$@$2=10],[1$@$8=8]]]]],[$Materials cost per unit,$$16,$$$20,$$$22],[$Direct labor per unit,$0\mathrm{.}38$ DL hours,$0\mathrm{.}50$ DL hours,$0\mathrm{.}40$ DL hours$],[$Machine hours per unit,$0\mathrm{.}5,0\mathrm{.}5,0\mathrm{.}3],[$Setup hours per run,$5,6,12]]$

Source: Casewriter.

Exhibit $4$ Monthly Production and Operating Statistics $($March $2006)$

$\backslash$table$[[,$Valves,Pumps,Flow Controllers,Total$],[$Production $($units$),7,500,12,500,4,000,24,000],[$Machine hours $($run time$),3,750,6,250,1,200,11,200],[$Production runs,$20,100,225,345],[$Setup hours $($labor and machines$),100,600,2,700,3,400],[$Number of shipments,$40,100,200,340],[$Hours of engineering work,$60,240,600,900]]$

Source: Casewriter.

How was the overhead rate of $185\%$ of production run labor cost determined $($formula only; no need of calculation$)?$ What is the actual overhead rate for the current month? Is this difference the reason why gross margin of pumps fell from budgeted $35\%$ to $5\%?$

Calculate the monthly practical capacity and the capacity cost rates for each of Sippican$$s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers.

Using these capacity cost rates and the production data in Ex$\mathrm{.}3$ and $4,$ calculate revised costs and profits for Sippican$$s three product lines, per unit and in total. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability?

Could this costing approach be extended to service companies and to companies much larger and more complex than Sippican? What would be the barriers and difficulties with implementing time$-$driven ABC in practice?

Calculate the cost of unused capacity for March. Unused capacity is defined as the practical capacity from Question $2$ subtracts capacity currently utilized to produce the three product lines. On the basis of the revised cost and profitability estimates, what actions should Sippican$$s management team take to improve the company$$s profitability?

Exhibit $1$ Sippican Corporation: Operating Results $($March $2006)$

Source: Casewriter.

Exhibit $2$ Product Profitability Analysis $($March $2006)$