CarryAll Company produces briefcases from leather, fabric, and synthetic materia
ID: 2445117 • Letter: C
Question
CarryAll Company produces briefcases from leather, fabric, and synthetic material in a single production department. The basic product is a standard briefcase that is made from leather, lined with fabric. CarryAll has a good reputation in the market because the standard briefcase is a high quality item and has been well-produced for many years.
Last year, the company decided to expand its product line and produce specialty briefcases for special orders. These briefcases differ from the standard in that they vary in size, they contain both leather and synthetic materials, and they are imprinted with the buyer’s logo, whereas the standard briefcase is simply imprinted with the CarryAll name in small letters. The use of some synthetic materials in the briefcase was made to hold down the materials costs. To reduce the labor costs per unit, most of the cutting and stitching on the specialty briefcases is done by automated machines which are used to a much lesser degree in the production of the standard briefcases. Because of these changes in the design and production of the specialty briefcases, CarryAll believed that they would cost less to produce than the standard briefcases. However, because they are specialty items, they were priced slightly higher—standards are priced at $30, specialty briefcases at $32.
After reviewing last month’s results of operations, CarryAll’s President became concerned about the profitability of the two product lines because the standard briefcase showed a loss while the specialty briefcase showed a greater profit margin than expected. The President is wondering whether the company should drop the standard briefcase and focus entirely on specialty items. The cost data for last month’s operations as reported to the President are as follows:
Factory overhead is applied on the basis of direct-labor hours. The rate of $8.98 per direct-labor hour was calculated by dividing the total overhead $50,500 for the month by the direct-labor hours of 5,625. As shown above, the cost of a standard briefcase is $0.49 higher than its $30 sales price whereas the specialty briefcase has a cost of only $22.74 for a gross profit per unit of $9.26. The problem with these costs is that they do not accurately reflect the activities involved in manufacturing each product. Determining the costs using ABC should provide better product costing data to help gauge the actual profitability of each product line.
Analyzing the Factory Overhead Costs
Explanation / Answer
Overhead Cost Per Unit
Standard
Speciality
Unit Cost and Profit under activity based costing
Activity Budgeted Activity Cost Budgeted Activity Level Cost Driver Activity Cost per Cost Driver Purchasing 6000 100 Number of Purchase Order 60.00 Receiving & Inspecting 7500 150 Number of deliveries 50.00 Setup Cost 10000 150 Number of set ups 66.67 Inspecting Finished goods 8000 400 Hours 20.00 Equipment Repair, Depreciation & Utilities 6000 10000 machine hours 0.60 Plant related 13000 10000 machine hours 1.30 Total Overhead 50500