Question

Whitman Printing has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.
For 2010, Whitman Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that the number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost Pool Manufacturing overhead costs Activity
Design changes $120,000 200 design changes
Setups 640,000 4,000 setups
Inspections    80,000 16,000 inspections
Total manufacturing overhead costs $840,000

During 2010, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 2
Setups 20 10
Inspections 30 38

When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems will ___?

a. contribute too little to profits, and Wallace Printing will not want to accept additional work from the company.
b. Will likely seek to do business with competitors
c. Is grossly under billed for the job, while other jobs will be unfairly over billed.
d. Is fairly billed because resources are allocated uniformly to all jobs.

Answer 1

Answer:

a. contribute too little to profits, and Wallace Printing will not want to accept additional work from the company.

Explanation:

For reaching any conclusion first we have to determine the cost assigned by using the single cost driver which is shown below:

= Rate × Pages printed

= ($840,000 ÷ 12,000,000) × 76,000

= $5,320

And  Cost assigned using ABC  is

= (120,000 ÷ 200) × 2 + (640,000 ÷ 4000) × 10 + (80,000 ÷ 16000) × 38

= $2,990

By this above calculation, the first option is chosen as the cost are high as compared to the ABC while on the other hand the profit would be NIL