QUESTION 1 Kajaria is model M2. Details of the two a manufacturing business whic
ID: 2328412 • Letter: Q
Question
QUESTION 1 Kajaria is model M2. Details of the two a manufacturing business which makes a product in two models: Model M1 and products are as follows: Model M1 Model M2 8,000 units 8,000 units Particulars Annual sales Number of sales orders 60 Sales price per unit Direct material cost per unit $11 Direct labour hours per unit 2 hours Direct labour rate per hour $8 Special parts per unit Production batch size Set-ups per batch 250 $73 $21 $54 2.5 hours $8 2,000 units 100 units 3 Other relevant information is as follows: Particulars Setup costs Amount ($) Cost driver 97,600 Number of setups 42,000 Material handling costs Number of batches Special part handling 50,000 Number of special costs parts Number of sales orders Invoicing 31,000 108 000 Direct labour hours Other overheads A customer has indicated an interest in placing a large order for either model M1 or M2 and the sales manager wished to try to sell the higher priced model M2. Required (a) Calculate the profit per unit for each model using activity-based costing. (b) Identify which product the sales manager should try to sell based on the information provided by your analysis. If there is a loss-making product, then advise the relevant information that the management needs to consider in taking any decision in relation to the loss making product. (20+5- 25 marks)Explanation / Answer
Answer
---Step 1: Calculation of no. of cost drivers
Working
M1
M2
A
No. of units
8,000
8,000
B
Batch Size
2,000
100
C = A/B
No. of batches
4
80
D
Setups per batch
1
3
E = C x D
No. of setups
4
240
F
Special parts per unit
2
8
G = A x F
No. of special parts
16,000
64,000
H
DLH per unit
2
3
I = A x H
Total DLHs
16,000
20,000
---Step 2: Calculation of activity rate per cost driver
No. of cost drivers for
Activity Cost pool
Overhead cost
Cost drivers
M1
M2
Total no. of cost drivers
Activity Rate per cost driver
Setup costs
$ 97,600.00
Setup
4
240
244
$ 400.000
per Setup
Material handing cost
$ 42,000.00
Batch
4
80
84
$ 500.000
per Batch
Special part handling costs
$ 50,000.00
Special part
16,000
64,000
80,000
$ 0.625
per Special part
Invoicing
$ 31,000.00
Sale Order
60
250
310
$ 100.000
per Sale Order
Other overheads
$ 108,000.00
Direct labor hour
16,000
20,000
36,000
$ 3.000
per Direct labor hour
Total
$ 328,600.00
---Step 3: Allocation of overhead to M1 using above activity rates
Overhead allocation to M1
Activity Rate per cost driver
No. of cost driver for M1
Overheads allocated
Setup costs
$ 400.000
per Setup
4
$ 1,600.00
Material handing cost
$ 500.000
per Batch
4
$ 2,000.00
Special part handling costs
$ 0.625
per Special part
16,000
$ 10,000.00
Invoicing
$ 100.000
per Sale Order
60
$ 6,000.00
Other overheads
$ 3.000
per Direct labor hour
16,000
$ 48,000.00
Total Overheads allocated
$ 67,600.00
Total M1 Units
8,000
Overhead cost per unit
$ 8.45
---Step 4: Allocation of overhead of M2 using activity rates
Overhead allocation to M2
Activity Rate per cost driver
No. of cost driver for M1
Overheads allocated
Setup costs
$ 400.000
per Setup
240
$ 96,000.00
Material handing cost
$ 500.000
per Batch
80
$ 40,000.00
Special part handling costs
$ 0.625
per Special part
64,000
$ 40,000.00
Invoicing
$ 100.000
per Sale Order
250
$ 25,000.00
Other overheads
$ 3.000
per Direct labor hour
20,000
$ 60,000.00
Total Overheads allocated
$ 261,000.00
Total M2 Units
8,000
Overhead cost per unit
$ 32.63
M1
M2
Sale Price per unit
$ 54.00
$ 73.00
Per unit cost:
Direct material
$ 11.00
$ 21.00
Direct Labor
$ 16.00
$ 20.00
Overheads allocated
$ 8.45
$ 32.63
Total per unit cost
$ 35.45
$ 73.63
Net Profit per unit
$ 18.55
$ (0.63)
---Based on above Activity Based Costing analysis, it is certain that:
>Each unit of M1 model is generating $ 18.55 per unit, while
>Each unit of M2 is bearing a loss of $ 0.63 per unit.
---Hence, M1 should be produced and sold, based on above information.
---Decisions regarding Loss making M2 Model should include:
>Revised analysis of cost drivers calculation.
>Analysing if the product is generating positive contribution margin.
>Avoidable and Unavoidable fixed cost if it is discontinued.
Working
M1
M2
A
No. of units
8,000
8,000
B
Batch Size
2,000
100
C = A/B
No. of batches
4
80
D
Setups per batch
1
3
E = C x D
No. of setups
4
240
F
Special parts per unit
2
8
G = A x F
No. of special parts
16,000
64,000
H
DLH per unit
2
3
I = A x H
Total DLHs
16,000
20,000
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