4-31 (Product profitability analysis, unused
capacity, traditional activity-based costing) Northpack Inc., has
recently expanded its line of backpacks to include high-quality,
lightweight hiker backpacks. This new model uses more expensive material
and takes longer to produce. While a basic school backpack can be cut
and sewn together in 30 minutes, a hiker backpack takes 45 minutes to
cut and sew together. The school model is produced in batches of 1,000
packs, while the hiker model is produced in batches of 100 packs. Each
batch of the school model requires 1 hour of inspection time, and each
batch of the hiker model requires 2 hours of inspection time. Using
direct labor hours to allocate manufacturing support costs (which in
this company include ordering and packaging costs), product
profitability is analyzed as follows: ITEM SCHOOL BACKPACKS HIKER
BACKPACKS Sales 15.00 $30.00 Less: Direct materials 3.00 10.00 Direct
labor 5.00 7.50 Manufacturing support 4.00 6.00 Gross margin $3.00 $6.50
Selling and administrative 1.00 2.00 Profit $2.00 $4.50 Sales volume
90,000 6,000 Jens Schmit, the controller at Northpack, believes that
activity based costing may be a more accurate way of measuring the costs
of the two models. He has traced manufacturing support costs to the
following activity pools and determined the practical capacity levels of
the associated activity drivers Activity activity Costs Act. Driver
Sch. Mod Hiker Mod Cutting Machines 52,000 Machine hours 9,000 1,125
Sewing Machines 163,300 Direct Labor Hours 45,000 4,500 Packaging-order
8,300 Number of Orders 450 200 related Packaging- volume 150,000 Number
of items 90,000 6,000 Orders 14,000 Number of orders 450 200 Inspections
8,400 Hours of inspection ? ? Total $396,000 Selling and administrative
expenses are $102,000 fixed business-sustaining costs. Customers pay
actual shipping charges, which are not included in these figures. a. The
method of assigning costs to individual products does not affect the
total manufacturing supports costs. Only the amounts assigned to
individual products change. Explain why Jens should care about how
support costs are assigned to individual products. B Using activity
based costing, calculate the cost per unit for each of the two models
and analyze their profitability. c. How might managers use the activity
based costing information to enhance the company’s profitability?
Consider pricing changes and process changes among your suggestions d.
Suppose that practical capacity remains as described earlier but that
demand for the school model is on 85,000 units, while demand for the
hiker model remains at 6,000 units. For the school model, the cutting
machine hours are now 8,500 and the number of orders is 425. Calculate
the cost per unit for each of the two models and prepare an income
statement similar to Exhibit 4-7 but also showing the cost of unused
capacity for each activity. What actions might management take to deal
with the unused capacity highlighted in your analysis?
Click here for the solution: 4-31 (Product profitability analysis, unused capacity, traditional activity-based costing) Northpack Inc., has recently expanded its line of backpacks to include high-quality, lightweight hiker backpacks
