Brrrrr Company Problem Solution
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Brrrrr Problem SolutionBrrrrr Company manufactures two models of snowblowers: push and self-propelled. The company has manufactured the push model for years; the self-propelled model was introduced recently to tap a new segment of the market. While competitors charge quite a bit more for similar models, the self-propelled model is extremely profitable for Brrrrr. Although sales of the self-propelled model have been increasing rapidly, the company’s profits have steadily declined. Management has become increasingly concerned about the accuracy of its costing system. The current cost accounting system allocates manufacturing overhead costs to the two products on the basis of direct labor hours. For 2006, the company has estimated that it will incur $3,570,000 in manufacturing support costs and produce 50,000 units of the push model and 10,000 units of the self-propelled model. The push model requires one hour of direct labor and the self-propelled model requires 2 hours. Direct labor costs $30 per DLH. The push model requires 1 machine hours and the self-propelled model requires 4 machine hours. Direct costs and selling prices per unit are as follows:PushSelf-PropelledDirect Material$38$54Selling Price$145$275The company is considering switching to an ABC system. A recent cost study revealed the following activities and costs:ActivityAnnual CostEngineering Design$440,000Inspections$780,000Production Set-ups$610,000Scheduling$220,000Material Handling$295,000Machine Maintenance$450,000Facility Costs$775,000TOTAL$3,570,000The company schedules each production run. It doesn’t matter what type of product is being scheduled – they each take about the same amount of time. Material is pulled for each production run and is moved from workstation to workstation for each production run. The company has decided that facility-level costs should be allocated based on direct labor hours. They have calculated the following information related to activities:
Activity InformationPushSelf-Propelled# of units per batch500100Setup time per batch0.5 hour0.5 hour# of Inspections per batch11Inspection time per batch0.5 hour1.5 hourEngineering Design Hours350 hours650 hoursRequirements:a. Determine the plant-wide overhead rate using the current costing system.$3,570,000 of MOH costs 50,000 units of push model @ 1 DLH/unit = 50,000 DLH10,000 units of self-propelled model @ 2 DLH/unit = 20,000 DLHTotal DLH = 70,000MOH Rate = $3,570,000 / 70,000 DLH = $51.00 per DLHb. Determine the gross margin (per unit) of the two models using the current costing system.Push: DM = $38 DL = $30/DLH * 1 DLH = $30 MOH = $51.00 * 1 DLH = $51 Total Product Cost = $119.00 Selling Price = $145 Gross Margin = $145 – $119 = $26 per unitSelf-Propelled: DM = $54 DL = $30/DLH * 2 DLH = $60 MOH = $51 * 2 DLH = $102.00 Total Product Cost = $216.00 Selling Price = $275 Gross Margin = $275 – $216 = $59 per unitc. For each activity, calculate activity ratesActivityAnnual CostActivity DriverTotalActivity RateEngineering Design$440,000Engineering hrs1,000$440.00Inspections$780,000Inspection Hrs200$3,900.00Production Set-ups$610,000Setup time200$6,100.00Scheduling$220,000# of batches200$1,100.00Material Handling$295,000# of batches200$1,475.00Machine Maintenance$450,000MH90,000$5.00Facility Costs$775,000DLH70,000$11.07d. Determine the gross margin (per unit) of the two models using the ABC information.