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ABC – Maxey & SonsMaxey & Sons manufactures two types of storage cabinets
– Type A and Type B – and applies manufacturing overhead to all units at the
rate of $80 per machine hour. Production information follows.Type A Type BAnticipated volume (units) 8,000 15,000Direct-material cost $35 $60Direct-labor cost 20 20The controller, who is studying the use of activity-based
costing, has determined that the firm’s overhead can be identified with three
activities: manufacturing setups, machine processing, and product shipping.
Data on the number of setups, machine hours, and outgoing shipments, which are
the activities’ three respective cost drivers, follow.Type A Type B TotalSetups 50 30 80Machine hours 16,000 22,500 38,500Outgoing shipments 100 75 175The firm’s total overhead of $3,080,000 is subdivided as
follows: manufacturing setups, $672,000; machine processing, $1,848,000; and
product shipping, $560,000.1. Compute
the unit manufacturing cost of Type A and Type B storage cabinets by using the
company’s current overhead costing procedures.2. Compute
the unit manufacturing cost of Type A and Type B storage cabinets by using
activity-based costing.3. Is the
cost of the Type A storage cabinet overstated or understated by the use of
machine hours to allocate total manufacturing overhead to production? By how
much?
4. Assume
that the current selling price of a Type A storage cabinet is $260 and the
marketing manager is contemplating a $30 discount to simulate volume. Is the
discount advisable? Briefly discuss.