The New Millenium Manufacturing Company produces two products. One is a millenium surf kit. The other product is a professional surf-board (short board) used in world class surfing competition. Most of the sales come from the millenium surf product, but recently sales of professional boards have been increasing. The following information relates to the products for the most recent fiscal year:
Millenium Surf Kit Professional Board
Sales (units) 1,500 500
Selling price per unit $980 $650
Direct labor hours required to produce one unit 6 9
Machine hours required to produce one unit 5 8
Direct material costs per unit $212 $265
Direct labor costs per unit $85 $85
Management is concerned about the current system's effectiveness in allocating overhead and in computing the production costs of the two products. Consequently, Millenium Manufacturing hires a consultant to analyze the overhead costs and assist the company in creating an activity-based costing system. The consultant breaks down the total overhead costs into four categories and measured the activity levels for those same categories as shown below:
Description Cost Driver
Millenium Surf Kit
Level of Activity Professional Board
Level of Activity Total Costs
Equipment Machine hours 7,500 4,000 $90,000
Material Orders Number of orders 150 475 33,000
Machine Setups Number of setups 70 216 30,600
Quality Control Direct labor hours 5 25 58,000
1. Calculate the manufacturing overhead rate based on labor hours and machine hours (two separate computations).
2. Determine the cost to manufacturing one unit of each model using two different traditional approaches; direct labor hours and machine hours.
3. Determine the cost to manufacturing one unit of each model using the activity-based costing data presented above.
4. Is the millenium surf kit as profitable as the company may think it is based on its present system?
5. What should Millenium Manufacturing Company do to improve its profitability?
Calculate the manufacturing overhead rate based on labor hours and machine hours in this case.