ABC – Maxey & Sons Maxey & Sons manufactures two types of storage cabinets – Type A and Type…

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ABC – Maxey & Sons
Maxey & Sons manufactures two types of storage cabinets
– Type A and Type B
– and applies manufacturing overhead to all units at the

rate of $80 per machine hour Production information follows

Type A Type B

Anticipated volume (units) 8,000 15,000

Direct-material cost $35 $60

Direct-labor cost 20 20

The controller, who is studying the use of activity-based
costing, has determined that the firm’s overhead can be identified with three
activities: manufacturing setups, machine processing, and product shipping
Data on the number of setups, machine hours, and outgoing shipments, which are
the activities’ three respective cost drivers, follow

Type A Type B Total

Setups 50 30 80

Machine hours 16,000 22,500 38,500

Outgoing shipments 100 75 175

The firm’s total overhead of $3,080,000 is subdivided as
follows: manufacturing setups, $672,000; machine processing, $1,848,000; and
product shipping, $560,000

1 Compute
the unit manufacturing cost of Type A and Type B storage cabinets by using the
company’s current overhead costing procedures

2 Compute
the unit manufacturing cost of Type A and Type B storage cabinets by using
activity-based costing

3 Is the
cost of the Type A storage cabinet overstated or understated by the use of
machine hours to allocate total manufacturing overhead to production? By how
much?

4 Assume
that the current selling price of a Type A storage cabinet is $260 and the
marketing manager is contemplating a $30 discount to simulate volume Is the
discount advisable? Briefly discuss

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