The Canadian Motorcycle Company (CMC) produces two models of motorcycles: Faster and Slower. The company has five categories of overhead costs: purchasing, receiving, machine operating costs, handling, and shipping. Each category represents the following percentages of total overhead costs, which amount to $4 million:

Current capacity is 200,000 machine hours, and the current production uses 100% of the available hours. The sales mix is 45% Faster and 55% Slower. The overhead costs are applied to each model based on machine hours.
The production costs for each model of motorcycle and other relevant information are as follows:

Instructions
(a) CMC determines its prices by adding 40% to the materials and direct labour. Determine if this pricing policy is appropriate. Show all calculations to support your answer.
(b) Use an activity-based approach to determine whether CMC can make a profit if it sells the Faster model for $15,000. Show all supporting calculations. (Round all answers to the nearest dollar.)

Transcribed Image Text:

Purchasing Receiving Machine operating 25.096 12.5% 37.5% Handling Shipping 10.0% 15.0% Faster $8,000 $1,750 Slower $6,500 $1,850 Direct materials per unit Direct labour per unit Applied overhead Number of units produced Number of purchases Number of shipments received Percentage of machine hours consumed 400 500 4 50% 50% by each product Number of moves in handling Number of kilometres to ship to customers 75 4,000 100 4,250