Question;Project # 4- ACCT122 Spring 2013;Due April 25, 2013.;This case compares the traditional;single overhead allocation rate to the activity based costing system.;ANALYTICAL THINKING;?A dollar of gross profit per;briefcase? That?s ridiculous!? roared;Art Dejans, president of Carry All, Inc.;?Why do we go on producing those standard briefcases when we?re able to;make over $15 per unit on our specialty items?;Maybe it?s time to get out of the standard line and focus the whole;plant on specialty work.?;Mr.;Dejans is referring to a summary of unit costs and revenues that he had just;received from the company?s Accounting Department;Carry All;produces briefcases from leather, fabric, and synthetic materials in a single;plant. The basic product is a standard;briefcase that is made from leather lined with fabric. The standard briefcase is a high quality item;and has sold well for many years.;Last;year, the company decided to expand its product line and produce specialty;briefcases for special orders. These;briefcases differ from the standard in that they vary in size, they contain the;finest synthetic materials, and they are imprinted with the buyer?s name. To reduce labor costs on the specialty;briefcases, most of the cutting and stitching is done by automated;machines. These machines are used to a;much lesser degree in the production of standard briefcases.;?I;agree that the specialty business is looking better and better.? replied Sally;Henrie, the company?s marketing manager.;?And there seems to be plenty of specialty work out there, particularly;since the competition hasn?t been able to touch our price. Did you know that Armor Company, our biggest;competitor, charges over $50 a unit for its specialty items? Now that?s what I call gouging the customer!?;A;breakdown of the manufacturing cost for each of Carry All?s product lines is;given below;Manufacturing;overhead is applied to products on the basis of direct labor-hours. The rate of $16 per direct labor-hour is;determined by dividing the total manufacturing overhead cost for a month by the;direct labor-hours;Manufacturing overhead;cost: $90,000;Direct;labor-hours: 5,625 = $16 per;direct-labor hour;The following additional information is;available about the company and its products;a) Standard briefcases are produced in batches of 200 units, and;specialty briefcases are produced in batches of 25 units. Thus, the company does 50 setups for the;standard items each month and 100 setups for the specialty items. A setup for the standard items requires one;hour of time, whereas a setup for the specialty items requires two hours of;time.;b) All briefcases are inspected to ensure that quality standards are;met. A total of 300 hours of inspection;time is spent on the standard briefcases and 500 hours of inspection time is;spent on the specialty briefcases each month.;c) A standard briefcase requires 0.5 hours of machine time, and a;specialty briefcase requires 2.0 hours of machine hours.;d) The company is considering the use of activity-based costing as an;alternative to its traditional costing system for computing unit product;costs. Since these unit product costs;will be used for external financial reporting, all manufacturing overhead costs;are to be allocated to products and nonmanufacturing costs are to be excluded;from product costs. The activity-based;costing system has already been designed and costs allocated to the activity;cost pools. The activity cost pools and;activity measures are detailed below;I have;included a spreadsheet to assist you in the setup of this problem. Also, this might seem like a lot of information;but analyze the data and try not to read too much into the problem!;REQUIRED;1. Using activity-based costing, determine the amount of manufacturing;overhead cost that would be applied to each standard briefcase and each;specialty briefcase.;2. Using the date computed in (1) above and other data from the case as;needed, determine the unit product cost of each product line from the;perspective of the activity-based costing system.;3. Within the limitations of the data that have been provided, evaluate;the president?s concern about the profitability of the two product lines. Would you recommend that the company shift;its resources entirely to production of specialty briefcases? Explain.;4. Sally Henrie state that ?the competition hasn?t been able to touch;our price? on specialty business. Why do;you suppose the competition hasn?t been able to touch CarryAll?s price?
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