In the past, the Engine Enhancement division located at the Oakville plant has used a manufacturing support cost allocation rate based on machining hours. Recently, management has decided to pilot activity-based costing and has chosen its alternator production department for this project. The division produces three alternator models: Basic, Do-it-yourself (DIY) and Heavy Duty. The following information has been obtained from the company’s records over the past year:
Basic
DIY
Heavy Duty
Total
Units produced
200,000
50,000
10,000
260,000
Direct material cost per unit
$40
$50
$60
Direct labour cost per hour
$30
Direct labour hours incurred
15,000
5,000
Inspections per unit
2
3
4
Machining hours per unit
.1
.2
.3
Batches packed and shipped
2,000
Manufacturing support costs of $2,705,000 were incurred last year as follows:
Inspections
$885,000
Machining
$1,650,000
Packing and shipping
$170,000
$2,705,000
Required
1.Determine the unit cost of each product using activity-based costing
2.Based on the results of the activity-based costing pilot, the selling price of the DIY alternator to Apexcustomers is currently about $3 per unit below total costs. The management team initially considered discontinuing production of the DIY alternator. The marketing manager indicated that the price of the DIY alternator could not be raised, as it is already somewhat higher than a major competitor’s equivalent product. Using the information provided in part 1, what other actions might Apex consider to increase profitability of the DIY alternator? Provide at least four specific ideas.
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