Outdoor Things makes umbrellas, gazebos, and lawn chairs. The company uses a traditional overhead allocation method and assigns overhead to products based on direct labor hours. In 2006, the company produced 100,000 umbrellas, 10,000 gazebos, and 30,000 lawn chairs and incurred $1,950,000 of manufacturing overhead costs. Direct material and labor cost data per unit estimated for 2006 are as follows:

 

 

Unit Cost

Umbrellas

Gazebos

Lawn Chairs

Direct material

$2 per yard

2 yards

20 yards

2 yards

Direct labor

$12 per hour

30 minutes

3.75 hours

75 minutes

Because profitability has been lagging and competition has been getting more keen, Outdoor Things is considering implementing an activity-based costing system for 2007. In analyzing the 2006 data, management determined that all $2,000,000 of its estimated factory overhead could be assigned to four basic activities: quality control, setups, material handling, and equipment operation. Data from 2006 on the costs associated with each of the four activities follows:

Quality Control

Setups

Material Handling

Equipment Operation

Total Costs

$100,000

$100,000

$300,000

$1,500,000

$2,000,000

 

Management estimated the following allocation bases and total 2006 volumes for each allocation base.

 

Activity

Base

Volume

Quality control

Setups

Material handling

Equipment operation

Direct labor

Number of units produced

Number of setups

Pounds of material used

Number of machine hours

Number of direct labor hours

140,000

1,000

2,000,000

1,000,000

200,000

 

Actual measures for 2006 for each product and each allocation base were as follows:

 

 

Umbrellas

Gazebos

Lawn Chairs

Number of units

100,000

10,000

30,000

Number of setups 200 400 400
Pounds of material 400,000 1,000,000 600,000
Number of machine hours 200,000 400,000 400,000
Hours of direct labor 50,000 105,000 50,000

 

For 2006, use ABC to determine the cost per unit for each umbrella sold.

 

Harry's Subs delivers 3-foot sub sandwiches. Each sub sells for $35. The manager, Harry Sub, has projected the following costs corresponding to sales of 5,000 and 6,000 subs for the next month’s operation:                      

 

                     

Cost Items

5,000 Subs

6,000 Pizzas

Meat

     $8,000

$ 4,800

Bread

       5,000

   3,000

Cheese

       9,000

   5,400

Vegetables

       6,000

   3,600

Utilities

       8,000

   4,500

Kitchen personnel

       6,000

   3,000

Delivery personnel

       4,400

   2,600

Car Expenses

       5,000

   5,000

Facilities

       8,000

   8,000

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       4,500

   4,500

 

Require 

Step 2: Express each item in terms of a cost equation in the form TC =FC + VC(x)