Question

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activity based costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:

Standard Deluxe

Sales price \( 800.00 \) 940.00

Direct materials 31.00 48.00

Direct labor 45.00 52.00

Because of limited machine hour capacity, Eason can produce either2,000 standard rims or2,000 deluxe rims.

Requirements

1. If Eason’s managers rely on the ABC unit cost data computed in Exercise E19-20, which model will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses for this calculation.)

Short answer

The standard model would be preferred to produce as it gives 63% of gross profit.

Step-by-step solution

Step-by-Step-SolutionStep 1: Computation of profit percent for Standard Model

Per unit indirect cost (computed earlier): $224.4

$$\begin{gathered} \mathbf{Total}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Direct}\mathbf{}\mathbf{Material}\mathbf{+}\mathbf{Direct}\mathbf{}\mathbf{labor}\mathbf{+}\mathbf{Indirect}\mathbf{}\mathbf{Cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{31}\mathbf{+}\mathbf{\$}\mathbf{45}\mathbf{+}\mathbf{\$}\mathbf{224}\mathbf{.}\mathbf{4} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{300}\mathbf{.}\mathbf{4} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Or}\mathbf{}\mathbf{\$}\mathbf{300} \end{gathered}$$

$$\begin{gathered} \mathbf{Profit}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\mathbf{Sales}\mathbf{}\mathbf{Price}\mathbf{-}\mathbf{Per}\mathbf{}\mathbf{unit}\mathbf{}\mathbf{cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{800}\mathbf{-}\mathbf{\$}\mathbf{300} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{500} \end{gathered}$$

$$\begin{gathered} \mathbf{Profit}\mathbf{}\mathbf{Percent}\mathbf{=}\frac{\mathbf{Profit}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}}{\mathbf{Selling}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}}\mathbf{\times }\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{500}}{\mathbf{\$}\mathbf{800}}\mathbf{\times }\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{62}\mathbf{.}\mathbf{5}\mathbf{\%} \end{gathered}$$

Computation of profit percent for Deluxe Model

Per unit indirect cost (computed earlier): $719.4

$$\begin{gathered} \mathbf{Total}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Direct}\mathbf{}\mathbf{Material}\mathbf{+}\mathbf{Direct}\mathbf{}\mathbf{labor}\mathbf{+}\mathbf{Indirect}\mathbf{}\mathbf{Cost} \\ \begin{array}{c}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{48}\mathbf{+}\mathbf{\$}\mathbf{52}\mathbf{+}\mathbf{\$}\mathbf{719}\mathbf{.}\mathbf{4}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{819}\mathbf{.}\mathbf{4}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Or}\mathbf{}\mathbf{\$}\mathbf{819}\end{array} \end{gathered}$$

$\begin{array}{c}\mathbf{Profit}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\mathbf{Sales}\mathbf{}\mathbf{Price}\mathbf{-}\mathbf{Per}\mathbf{}\mathbf{unit}\mathbf{}\mathbf{cost}\\ \mathbf{=}\mathbf{\$}\mathbf{940}\mathbf{-}\mathbf{\$}\mathbf{819}\\ \mathbf{=}\mathbf{\$}\mathbf{121}\end{array}$

role="math" localid="1653278496311" $$\begin{gathered} \mathbf{Profit}\mathbf{}\mathbf{Percent}\mathbf{=}\frac{\mathbf{Profit}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}}{\mathbf{Selling}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Unit}}\mathbf{\times }\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{121}}{\mathbf{\$}\mathbf{940}}\mathbf{\times }\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{12}\mathbf{.}\mathbf{87}\mathbf{\%} \end{gathered}$$

The preferred model to produce

As computed above, the standard model yields 63% gross profit but the deluxe model only produces 13% of gross profit. So the preferred model for production would be the standard model.