1. Calculate the gross margin per unit of the unique product under the current c
ID: 2343805 • Letter: 1
Question
1. Calculate the gross margin per unit of the unique product under the current cost system.
2. For this question only assume that actual manufacturing overhead costs were $420,000 and actual direct labor hours were 27,500. How much is over/underapplied overhead?
For the next 3 questions, assume that the $400,000 in manufacturing overhead was driven by the following activities.
Anderson Company uses the activity rate method. The cost of any unused capacity is not assigned to the two product lines.
3. Calculate the total manufacturing overhead cost assigned to the standard product under ABC.
4. Was the unique product over or under-costed in the traditional cost system compared to ABC?
5. How much of the $400,000 in manufacturing overhead cost is unutilized?
6. For this question only, assume that the ABC analysis showed that the total manufacturing cost of the unique model was $160 per unit. Anderson uses target costing to set its cost reduction goals. A recent market study revealed that customers would be willing to pay $180 for the unique product, and Anderson?s stockholders require a 20% gross margin. What is the cost reduction target (as a percentage of the ABC cost) for the unique product?
7. Provide two specific suggestions for how Anderson can use ABM to meet the cost reduction target calculated above:
Explanation / Answer
1. Calculate the gross margin per unit of the unique product under the current cost system.
$195 - $75 - $60 - $53.33 = $6.67
2. For this question only assume that actual manufacturing overhead costs were $420,000 and actual direct labor hours were 27,500. How much is over/underapplied overhead?
Overhead rate = $400,000 / (15,000 +(5,000x2)) = $16 per hour
DL 27,500 Standard 27,500 x $16 x 1 /3 = $146,667
Unique 27,500 x $16 x 2/3 = $293,333
Total overhead applied $440,000
Overhead over applied = $420,000 - $440,000 = $20,000
3. Calculate the total manufacturing overhead cost assigned to the standard product under ABC.
Standard Unique
Materials Handling $120,000 x 1/5 24,000
$120,000 x 4/5 96,000
Machine set-ups $70,000 x 4/10 28,000
$70,000 x 6/10 42,000
Eng. Support $80,000 x 400/1600 20,000
$80,000 x 1000/1600 50,000
Power & Space $130,000 x 20000/32500 80,000
$130,000 x 10000/32500 40,000
____________________
Total 152,000 230,000
4. Was the unique product over or under-costed in the traditional cost system compared to ABC?
Traditional cost = 15,000 x $8.89 = $133,000
Under-costed by $87,000 ($230,000 - $133,000)
5. How much of the $400,000 in manufacturing overhead cost is unutilized?
$400,000 - $152,000 - $230,000 = $18,000
6. For this question only, assume that the ABC analysis showed that the total manufacturing cost of the unique model was $160 per unit. Anderson uses target costing to set its cost reduction goals. A recent market study revealed that customers would be willing to pay $180 for the unique product, and Anderson’s stockholders require a 20% gross margin. What is the cost reduction target (as a percentage of the ABC cost) for the unique product?
Required gross margin = $180 - ($180x0.2) = $36
Required cost = $180 - $36 = $144
% Reduction = ($160 - $144) / $160 = $16/$160 = 10%
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