The EKK Home & Sofa Company mainly produces and sells sofas. The company has two main product lines: ordinary sofas and luxury sofas. Its products are sold through wholesalers. Due to the intense competition in recent years, the company is now facing two major problems. First, the ordinary sofa is a high-volume product, but its price is higher than other companies' products of the same type, so it has lost a lot of sales in recent years. Second, sales of high-margin luxury sofas are also declining.

At a recent business meeting, the vice president of marketing believed that the profit per unit of luxury sofas was higher, so he requested to strengthen the production and sales of luxury sofas. Costs have always been underestimated. He believes that cost drivers can better reflect the consumption of operating resources by various products, so he counter-recommends that companies use multiple cost drivers to analyze manufacturing overhead to make a more accurate allocation.

After the meeting, the company president didn't know he should take the advice of the vice president of marketing or the plant manager, so the company hired a consultant to address these issues. The company's current policy is only to adopt the traditional cost system, which allocates manufacturing overhead to products based on direct labor costs. To control costs, the consultant recommends using Activity-Based Costing to allocate overhead. The following information was used by the consultants:

Product direct cost information:

product	Annual output	Direct material per unit	Direct labor per unit	Price per unit
Ordinary sofa	80,000	$20	$10	$80
luxury sofa	8,000	$40	$16	$140

Activity-based costing data and cost drivers:

cost pool	cost driver	cost-sharing basis Estimated number of	normal type sofa	luxury sofa
machine running	machine hours	20,000 hours	17,000 hours	3,000 hours
Support labor costs	direct labor cost	$928,000	$800,000	$128,000
Machine preparation	curb hours	5,000 hours	3,000 hours	2,000 hours
assemble	number of parts	805,000 pieces	420,000 pieces	385,000 pieces
an examination	Check hours	8,000 hours	4,800 hours	3,200 hours

Indirect manufacturing overhead and operation consumption information:
cost pool	Indirect manufacturing cost
machine running	$354,000
Support labor costs	$185,600
Machine preparation	$98,350
assemble	$169,050
an examination	$121,000
total overhead	$928,000
Require:

1. Calculate the total manufacturing cost and unit manufacturing cost of the two products using traditional costing. 

2. Using the activity-based costing system, calculate the estimated overhead cost allocation rate for each type of overhead, as well as the total manufacturing cost and unit manufacturing cost of the two products.

3. Are luxury sofas as profitable under ABC as the VP of Marketing thinks? Try to make comments and explain why. 

Answer rating: 100% (QA)

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