Brrrrr Company Problem Solution

Brrrrr Problem Solution

Brrrrr 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:

The company is considering switching to an ABC system.  A recent cost study revealed the following activities and costs:

The 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:

Requirements:

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 DLH

10,000 units of self-propelled model @ 2 DLH/unit = 20,000 DLH

Total DLH = 70,000

MOH Rate = $3,570,000 / 70,000 DLH = $51.00 per DLH

b.        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 unit

Self-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 unit

c.        For each activity, calculate activity rates

d.        Determine the gross margin (per unit) of the two models using the ABC information.

...