Simpson Inc. produces a specialty top-quality juice machine. The product, the GK 78, requires four processes to be completed. Specifically, these processes are exterior construction, pulp filter insertion, painting, and packaging. Each function is performed at separate workstations with different completion ratios:
? Exterior construction can manufacture 100,000 juicer exteriors per day.
? Pulp filter insertion can install 30,000 filters every 6 hours.
? Painting can decorate 5,000 juicers every half hour.
? Packaging can package 8,000 juicers per hour.
a) How many GK 78 machines can Simpson Inc. manufacture per month (assume an average of 30 days per month and 8 hours per day)?
b) On which function should Simpson spend money to improve throughput?
c) If Simpson sells each juicer for $65 and has variable costs of $45, should Simpson spend $300,000 to improve the workstation that is the current bottleneck until a second workstation becomes a bottleneck?
4. A company sells three products, X, Y, and Z, with the following characteristics:
Product X Product Y Product Z
Price per unit $18 $21 $25
Variable cost per unit $12 $15 $23
Expected sales (units) 200,000 300,000 400,000
Fixed costs are expected to be $2,300,000.
a) Using the information provided above, what is the expected level of the operating profits?
b) Compute the break-even point in revenues for the company assuming a constant product mix.
5. Alpha Company produces a variety of electronic equipment. One of its plants produces printers, the superior and the regular. At the beginning of the year 2014, the following data were prepared for this plant:
Quantity 200,000 900,000
Selling price $500.00 $200.00
Unit prime cost* $200.00 $90.00
Unit overhead cost $32.50 $100.00
Prime cost equals direct materials and direct labor.
The unit overhead cost is calculated using the predetermined overhead application
rate based on direct labor-hours.
Upon examining the data, the manager of marketing was particularly impressed with the per-unit profitability of the superior printer and suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that the cost of the superior printer was understated. He argued that overhead costs could be assigned more accurately by using multiple cost drivers that reflected each product’s consumption. To convince top management that multiple rates could produce a significant difference in product costs, he obtained the following projected information from the controller for the preceding production output:
Overhead Activity Cost Driver Pool Rate* Superior Regular
Setups Number of setups $3,000 200 100
Machine costs Machine-hours $ 100 200,000 600,000
Engineering Engineering-hours $ 40 45,000 120,000
Packing Packing orders $ 30 80,000 220,000
*Cost per unit of cost driver Total overhead cost = $96,500,000
a) Using the projected data based on traditional costing, calculate gross profit per unit, and total gross profit for each product.
b) Using the pool rates, calculate the overhead cost per unit for each product. Using this new unit cost, calculate gross profit per unit, and total gross profit for each product.
c) In view of the outcome in requirement 2, evaluate the suggestion of the manager of marketing to switch the emphasis to the superior model.
d) How does activity based costing add to Alpha’s competitive advantage?