Way Cool produces two different models of air conditioners. The company produces the mechanical systems in its components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow. Process Activity Overhead Cost Driver Quantity Components Changeover $ 500,000 Number of batches 800 Machining 279,000 Machine hours 6,000 Setups 225,000 Number of setups 120 $ 1,004,000 Finishing Welding $ 180,300 Welding hours 3,000 Inspecting 210,000 Number of inspections 700 Rework 75,000 Rework orders 300 $ 465,300 Support Purchasing $ 135,000 Purchase orders 450 Providing space 32,000 Number of units 5,000 Providing utilities 65,000 Number of units 5,000 $ 232,000 Additional production information concerning its two product lines follows. Model 145 Model 212 Units produced 1,500 3,500 Welding hours 800 2,200 Batches 400 400 Number of inspections 400 300 Machine hours 1,800 4,200 Setups 60 60 Rework orders 160 140 Purchase orders 300 150 Required: 1. Using ABC, compute the overhead cost per unit for each product line. 2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212. 3. If the market price for Model 145 is $820 and the market price for Model 212 is $480, determine the profit or loss per unit for each model.

Way Cool

1. Using ABC, the overhead cost per unit for each product line:

                                      Model 145   Model 212

Overhead cost per unit  $496.19       $245.72

2. The total cost per unit for each product line, if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212:

                                   Model 145      Model 212

Total cost per unit       $746.19          $425.72

3. If the market price for Model 145 is $820 and the market price for Model 212 is $480, the profit or loss per unit for each model:

                             Model 145   Model 212

Profit per unit          $73.81         $54.28

Explanation:

a) Data and Calculations:

Process Activity                  Overhead Cost    Driver                    Quantity

Components Changeover       $ 500,000  Number of batches     800

Machining                                     279,000  Machine hours         6,000

Setups                                          225,000  Number of setups        120

Total                                        $ 1,004,000

Finishing

Welding                                     $ 180,300  Welding hours           3,000

Inspecting                                    210,000  Number of inspections 700

Rework                                          75,000  Rework orders              300

Total                                         $ 465,300

Support

Purchasing                               $ 135,000  Purchase orders          450

Providing space                            32,000  Number of units       5,000

Providing utilities                          65,000  Number of units       5,000

Total                                        $ 232,000

Additional production information concerning its two product lines follows:

                                   Model 145   Model 212     Total

Units produced                   1,500         3,500    5,000

Welding hours                       800        2,200     3,000

Batches                                  400           400        800

Number of inspections         400           300        700

Machine hours                    1,800        4,200    6,000

Setups                                     60              60        120

Rework orders                      160             140       300

Purchase orders                  300             150       450

Overhead Rates per Activity Pool:

Components Changeover       $ 500,000/800 = $625

Machining                                     279,000/6,000 = $46.50

Setups                                          225,000/120 = $1,875

Total                                        $ 1,004,000

Finishing

Welding                                     $ 180,300/3,000 = $60.10

Inspecting                                    210,000/700 = $300

Rework                                          75,000/300 = $250

Total                                         $ 465,300

Support

Purchasing                               $ 135,000/450 = $300

Providing space                            32,000/5,000 = $6.40

Providing utilities                          65,000/5,000 = $13

Total                                        $ 232,000

Total overheads = $

                                   Model 145   Model 212

Units produced                   1,500         3,500

Welding hours                  $48,080 (800*$60.10)  $132,220 (2,200*$60.10)

Batches                            250,000 (400*$625)     250,000 (400*$625)

Number of inspections    120,000 (400*$300)       90,000 (300*$300)

Machine hours                   83,700 (1,800*$46.50) 195,300 (4,200*$46.50)

Setups                               112,500 (60*$1,875)        112,500 (60*$1,875)

Rework orders                   40,000 (160*$250)        35,000 (140*$250)

Purchase orders                90,000 (300*$300)       45,000 (150*$300)

Total overhead costs    $744,280                       $860,020

Units produced                    1,500                              3,500

Overhead cost per unit  $496.19                         $245.72

Total production costs:

                                        Model 145      Model 212

Direct costs per unit          $250                $180

Total direct costs           $375,000       $630,000

Total overhead costs     $744,280       $860,020

Total production costs  $1,119,280     $1,490,020

Units produced                     1,500              3,500

Total cost per unit            $746.19          $425.72

                                  Model 145      Model 212

Market price per unit  $820.00          $480.00

Total cost per unit          746.19          $425.72

Profit per unit                 $73.81            $54.28

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