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    ABC - Maxey & Sons

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    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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