AC 202 Fall 2017 Term Project Two dollars of gross margin per briefcase? That\'s

Question

AC 202 Fall 2017 Term Project Two dollars of gross margin per briefcase? That's ridiculous!" roarec Roy Thurmond, president of First-Line Cases, Inc. "Why do we go on producing those standard briefcases when we're able to make over $11 per unit on our specialty items? Maybe it's time to get out of the standard line and focus the whole plant on specialty work. Mr. Thurmond was referring to a summary of unit costs and revenues that he had just received from the company's accounting department Standard Briefcases Specialty Briefcases Selling price per unit Unit product cost $26.25 24.25 $42.50 31.40 $11.10 $ 2.00 FirstLine Cases produces briefcases from leather, fabric, and synthetic materials in a single plant. The basic product is a standard briefcase that is made from leather lined with fabric. The standard briefcase is a high-quality item and has sold well 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 the finest leather and synthetic materials, and they are imprinted with the buyer's name. To reduce labor costs on the specialty briefcases, automated machines do most of the cutting and stitching. These machines are used to a much lesser degree in the production of standard briefcases. I agree that the specialty business is looking better and better replied Beth Mersey, the company's marketing manager. "And there seems to be plenty of demand out there, particularly because the competition hasn't been able to touch our price. Did you know that Velsun Company, our biggest competitor, charges over $50 a unit for its specialty items? Now that's what I call gouging the customer!"

Explanation / Answer

1) Activity Measure which are missing in the quaetion

Calculation of Activity Base for each activity (Amount in $)

Calculation of Manufacturing Overhead cost (Amount in $)

2) Calculation of Unit cost of each product (Amount in $)

3) The president's concern was based on the data provided to him which was right because for allocation of manufacturing overhead only a predetermined overhead rate was used by the company. The predetermined overhead rate do not consider the actual effect of each activity and resultantly shows higher cost for Standard Briefcases and lower cost for Speciality briefcases.

The company's should not shift entirely to Speciality Briefcases because the profit margin per unit from Standard Briefcases is ($26.25-$20.48) = $5.77 whereas there is a loss from speciality Briefcases of ($42.50-$46.48) = -$3.98 per unit. Thus the company's profit earning product is only standard Briefcases not speciality briefcases.

4) The competition has not been able to touch Firstline Cases price because the speciality product's price charged by other competitor is nearly $50 per unit and the demand of this product is very high and the company can sold maximum no. of speciality briefcases then their competitors because it is offering the product at the cheapest price of $42.50 than its competitors.

Activity measure Standard Briefcases Speciality Briefcase Total Setup Hours 10 setups*1 hr = 10 25 setups*2 hrs = 50 60 Machine Hours 10,000 units*0.5 hr = 5,000 2,500 units*1.2 hrs = 3,000 8,000

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