ACCT 421 Final: REV GRAMMER TEST ANSWERS
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Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.
Lost Mine has offered to buy 3,500 of the US umbrellas at a price of $36 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:
| Direct materials | $ | 15.00 | |
| Direct labor | 8.00 | ||
| Variable manufacturing overhead | 11.00 | ||
| Fixed manufacturing overhead | 2.50 | ||
| Total cost | $ | 36.50 | |
| Regular sales price | $ | 44.00 | |
Required:
1. Compute the incremental profit (or loss) from accepting the special order.
3. Suppose that the special order had been to purchase 4,000 umbrellas for $33.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.
4. Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:
Stick | Collapsible | |
Units Sold | 60,000 | 3,000 |
Selling Price | $12.50 | $14.00 |
Direct Material Cost per Unit | $3 | $3.10 |
Direct Labor Cost per Hour | $7.50 | $8.00 |
Variable Manufacturing Overhead | $0.40 | $0.40 |
Variable Selling Costs | $1.10 | $1.10 |
Labor Hours per Unit | 0.2 | 0.2 |
Sales Orders | 120 | 1 |
Purchase Orders | 50 | 3 |
Production Runs | 45 | 6 |
Material Moves | 86 | 10 |
Machine Setups | 130 | 6 |
Machine Hours | 525 | 32 |
Inspections | 200 | 10 |
Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
Activity | Activity Cost | Activity Cost Driver |
Order Processing | $35,000 | Number of Sales Orders |
Purchasing | $36,000 | Number of Purchase Orders |
Material Handing | $28,000 | Material Moves |
Machine Setup | $14,000 | Machine Setups |
Production | $99,000 | Production Runs |
Assembly | $80,000 | Machine Hours |
Inspecting | $11,000 | Number of Inspections |
Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.
Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:
1.Calculate the allocation rates foreach cost driver using ABC.
2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.
3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.
