Anderson Company Manufctures two Products, Standard and Unique (A+)

Anderson Company Manufctures two Products, Standard and Unique, For Which the Following Budgeted Information is available.

Details Standard Unique Unit Produced 15000 5000 Target Selling Price 125 195 Manufacturing Cost Per Unit Direct Material 40 75 Direct Labor 30 60 Manufacturing Overhead ? ? Total Manufacturing Cost Per Unit Direct Labor Hour Per Unit 1 2 Machine hour Per Unit 1.5 2

The company Uses a traditional Costing System, with total Estimated Manufacturing Overhead of $400,000 Applied to the Two Products on the basis of direct Labor Hours.

1. Calculate the gross margin per unit of the standard product under the current cost system.

2. For this question only assume that actual manufacturing overhead costs were $440,000 and actual direct labor hours were 26,500. How much is over/underapplied overhead?

Assume that the $400,000 in manufacturing overhead was driven by the following activities.

Activity Driver Total Cost Practical Capacity Standard Unique Material Handling Material Movers 120000 5000 1000 4000 Machine Set-Ups No of Set ups 70000 100 40 60 Engineering Support Engineering Hours 80000 1600 400 1000 Power and Space Machine Hours 130000 32500 20000 10000

Anderson Company uses the Activity rate Method. the Cost of any unused Capacity is not assigned to the two product lines.

3. Calculate the total manufacturing overhead cost assigned to the standard product under ABC.

4. Was the unique product over or under-costed in the traditional cost system compared to ABC?

5. How much of the $400,000 in manufacturing overhead cost is unutilized?

6. For this question only, assume that the ABC analysis showed that the total manufacturing cost of the unique model was $160 per unit. Anderson uses target costing to set its cost reduction goals. A recent market study revealed that customers would be willing to pay $180 for the unique product, and Anderson’s stockholders require a 20% gross margin. What is the cost reduction target (as a percentage of the ABC cost) for the unique product?

7. Provide two specific suggestions for how Anderson can use ABM to meet the cost reduction target calculated above:

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