Based on the information below please help me answer the following questions: 1.

Question

Based on the information below please help me answer the following questions:

1. Provide at least 3 possible non-value added activities that the Charlotte facility may be experiencing?
2. Using the old plant-wide rate calculate gross profit.
3. Using the new cost pools and cost drivers (departmental rate) calculate gross profit.



Sue, the corporate controller, has, thus, far been impressed with your performance at the Charlotte plant. She thinks it is time for the Company to move forward with a more precise costing system. She meets with you to discuss if you are able to implement Activity Based Costing at Charlotte. Being on the fast-track, you are eager to demonstrate that you should be the successor to Sue and agreed to pilot ABC at Charlotte. You have gathered the following interim data for envelopes and cups.

Total production overhead $5,017,500
Envelopes Cups
Direct costs $8,250,000 $8,750,000
Units produced 1,500,000 350,000
Machine hours 200,000 50,000
Direct labor hours 34,500 153,625
Number of quality inspections 1,000 6,500
Revenue generated by the two products $15,000,000 $16,800,000

You have determined, using ABC, that overhead can be assigned to separate cost pools specifically:
Pool 1 = $1,260,000 using machine hours as the cost driver
Pool 2 = $2,257,500 using direct labor hours as the cost driver
Pool 3 = $1,500,000 using the number of quality inspections as the cost
driver

Historically, Charlotte has used a single plant-wide rate, machine hours for the allocation of overhead.

Explanation / Answer

1 Envelopes Cups Total Sales 15000000 16800000 31800000 less Direct Cost 8250000 8750000 17000000 Production overhead 4014000 1003500 5017500 Gross profit 2736000 7046500 9782500 Rate of return 18.24% 41.94% 2 Envelopes Cups Total Sales 15000000 16800000 31800000 less Direct Cost 8250000 8750000 17000000 Poo1 1 1008000 252000 1260000 5.04 Pool 2 414000 1843500 2257500 12 Pool 3 200000 1300000 1500000 200 Total cost 9872000 12145500 22017500 0 Gross profit 5128000 4654500 9782500 Rate of return 34.19% 27.71% 3 It is recommended that company should use ABC costing as it gives true picture of the rate of return on each product, because the cost is allocated on the basis of resources used. However there is no change in overall profit of the company. But it may affect the future profitability if company sells more product with higher rate of return which is of envelope, not of cups. II Material 18000 Labor 16500 Overhead 1500 Setup 340000 Handling 100000 Total cost 476000 Per unit cost 2380 If company has enough excess capacity to produce more then the any price more than 2380 per envelop should be accepted, because other cost such as product level and facility level cost are irrelevant in the situation. 2 Any selling price more than 2380 would have increase profit of the company if company do have excess capacity, but in case of the capacity is not in excess than all batch level and facility level cost will become relevant and the company income would have been negative if the price is offered which was acceptable in the above situation of having excess capacity

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