Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2018, Luzent compiled the following data for the two products:
| Sales price per unit | $650.00 | $475.00 |
| Prime costs per unit | $180.00 | $130.00 |
| Direct materials cost per unit | $95.00 | $75.00 |
| Direct labor costs per unit | $75.00 | $55.00 |
| Manufacturing support costs per unit | $ 80.00 | $120.00 |
Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2018:
| Activity | Cost Driver | Cost | Total | Deluxe | Standard |
| Setups | of setups | $ 500,000 | 500 | 400 | 100 |
| Machine-related | of machine hours | $44,000,000 | 600,000 | 300,000 | 300,000 |
| Packing | of shipments | $ 5,000,000 | 250,000 | 50,000 | 200,000 |
Required:
| a. | Using the current system, what is the estimated |
| 1. | total cost of manufacturing one unit for each type of door? |
| 2. | profit per unit for each type of door? |
| b. | Using the current system, estimated manufacturing overhead costs per unit are less for the |
deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?
c.
"ABC systems may result in misallocation of indirect costs." Do you agree? Give reasons for your answer.
| d. | What considerations need to be examined when determining a sales mix strategy? |
e. While implementing an ABC system for the first time, achieving a significant change overnight is difficult and this may de motivate employees. How can managers overcome this problem?
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