YoungerU, Inc., produces deluxe and regular home exercise equipment. Recently, YoungerU has been losing market share with its regular equipment because of com- petitors offering a product with the same quality and features but at a lower price. A careful market study revealed that if YoungerU could reduce its regular model price by $10 per unit, it would regain its former share of the market. Management, how- ever, is convinced that any price reduction must be accompanied by a cost reduction of $10 so that per-unit profitability is not affected. Cameron Hepworth, controller believes that poor overhead costing assignments may be distorting management's view of each product's cost and therefore, the ability change selling prices. Cameron has identified the following three overhead activities: machining, testing, and rework. The three activities, their costs, and practical capacities are as follows:
| Activity |
Cost |
Practical Capacity |
|
Machining
|
$1,800,000
|
150,000 machine hours
|
|
Testing
|
1,200,000
|
40,000 testing hours
|
|
Rework
|
600,000
|
20,000 rework hours
|
Other information regarding the two products is also provided. The consumption patterns of the two products are as follows:
| |
Regular |
Deluxe |
|
Units
|
100,000
|
10,000
|
|
Machine hours
|
50,000
|
10,000
|
|
Testing hours
|
20,000
|
20,000
|
|
Rework hours
|
5,000
|
15,000
|
YoungerU assigns overhead costs to the two products using a plantwide rate based on machine hours.
Required
1. Calculate the unit overhead cost of the regular exercise equipment using machine hours to assign overhead costs. Now, repeat the calculation using ABC to assign overhead costs. Did improving the accuracy of cost assignments solve YoungerU's competitive problem? What did it reveal?
2. Now, assume that in addition to improving the accuracy of cost assignments, Cameron observes that defective supplier components is the root cause of both the testing and rework activities. Suppose further that YoungerU has found a new supplier that provides higher quality components that such that testing and rework costs are reduced by 50 percent. Now, calculate the cost of each product (assuming that testing and rework time are also reduced by 50 percent) using ABC. The relative consumption patterns also remain the same. Comment on the difference between ABC and ABM.