Question

Question 4

Applying overhead using activity based costing for the following 2 models of boats

Cost Driver                                   Annual Cost          Total Activity

Production order set-up                  $147,600               4,800 set-ups

Raw Material ordering                   $216,800                8,000 items ordered

Product cleaning                          $1,680,200                   775 inspection approvals

Equipment usage                          $948,500              12,500 machine hours

Cost Driver                                    Activity Required                  Activity Required

                                                      Viking-star  (117 units)           Lion-star (86 units)

Production order set-up                  1,084 set-ups                     976 set-ups

Raw Material ordering                    2,050 items ordered            3,690 items ordered

Product cleaning                             201 inspec. app                 41 inspec. app

Equipment usage                           1,025 machine hrs.             1,575 machine hrs.

The following per unit data is also available

Viking-star; price $39,999, Direct labor $13,021, Direct material $17,385

Lion-star; price $31,999, Direct labor $9,623, Direct Material $13,792

Which product is more profitable?

Answer 1

				Viking star		Lion star
Cost Driver	Annual cost	Total activity	Activity rate R	Activity A	Cost allocated R*a	Activity B	Cost allocated R*B
Production order set-up	$147,600	4800	$30.75	1084	$33,333	976	$30,012
Raw Material ordering	216800	8000	$27.10	2050	$55,555	3690	$99,999
Product cleaning	1680200	775	$2,168.00	201	$435,768	41	$88,888
Equipment usage	948500	12500	$75.88	1025	$77,777	1575	$119,511
	$2,993,100			Total T	$602,433		$338,410
			No. of units produced N		117		86
			Overhead cost per unit T/N		$5,149		$3,935
	Viking star	Lion star
Sales price	$39,999	$31,999
Less:
Direct Material	$13,021	$9,623
Direrct labor	17385	13792
Overhead	$5,149	$3,935
Total cost	$35,555	$27,350
Profit P	$4,444	$4,649
No. of units produced U	117	86
Total profit P*U	$519,948	$399,814
If we see in terms of total profit it is better to produce Viking star as units produced are more than of Lion star
But we see profit per unit Lion star is more profitable
Answer So if overall profitablility is seen Viking star is more profitable