Using ABC for strategic decisions
Consider the following data for two products of Vigano Manufacturing.
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Overhead Cost
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Product A
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Product B
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Number of units produced .................
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10,000 units
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2,000 units
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Direct labor cost (@$24 per DLH) ........
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0.20 DLH per unit
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0.25 DLH per unit
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|
Direct materials cost.........................
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$2 per unit
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$3 per unit
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Activity
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|
|
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Machine setup .....................................
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$121,000
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|
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Materials handling ...............................
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48,000
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|
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Quality control .............................
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80,000
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$249,000
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1. Using direct labor hours as the basis for assigning overhead costs, determine the total production cost per unit for each product line.
2. If the market price for Product A is $20 and the market price for Product B is $60, determine the profit or loss per unit for each product. Comment on the results.
3. Consider the following additional information about these two product lines. If ABC is used for assigning overhead costs to products, what is the cost per unit for Product A and for Product B?
Number of setups required for production 10 setups 12 setups
Number of parts required I part/unit 3 parts/unit
Inspection hours 40 hours 210 hours
4. Determine the profit or loss per unit for each product. Should this information influence company strategy? Explain.