Tutorial 10.pptx - Tutorial 10 Activity based costing and...

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Tutorial 10Activity based costing and management
Problem 1 (ABC model for product costs)Zeus Optical is a specialist manufacturer of optical instruments. Zeus has recently expanded its core product market of binoculars into making eyepieces for microscopes/telescopes, and screw-on lenses for digital SLR cameras. The firm believes that it makes little money selling binoculars, and that these new markets have great profit potential.Somewhat to Zeus's surprise, it finds it tough to make money with eyepieces. As of now, the firm is selling the product at a negative profit margin. Yet, Zeus faces intense price pressure in this segment and thinks that it might have to lower prices by 5% or more to stay competitive. The market for binoculars has been stable for several years, and Zeus expects the trends to continue for the near future. Zeus is most excited about entering the market for screw-on lenses for digital SLR cameras. Although current volumes are small (relatively), Zeus believes that there is substantial market potential for this product. Leveraging its excellent reputation for optics and lenses, Zeus believes that it could reach and sustain three times the current volume of this product. This strategy also makes sense financially as this product is the most profitable of the three lines, per the firm's accounting records.The following table provides key information about the product lines. (Note: All data have been disguised for confidentiality. However, relations among data items have been preserved.) 2
Problem 1 (continued)EyepiecesBinocularsCamera LensSales volume (units)16,00020,0003,000Price$53.00$78.00$160.00Unit variable cost30.0045.00118.00Unit contribution margin$23.00$33.00$42.00Unit profit margin($2.50)$0.70$6.30Labor hours/unit1.51.92.1Currently, the firm incurs $1,161,100 in overhead costs annually. It allocates this overhead among product lines using the number of labor hours used by each product line. Zeus's management realizes that moving to camera lenses is a major shift in their product and market focus. Moreover, they know that factory personnel have complained about the increased coordination required for producing lenses. Thus, management wants you to conduct a detailed study of product costs.You collect the following data. 3
Problem 1 (continued)EyepiecesBinocularsCamera LensSales volume (units)16,00020,0003,000batch size3,2001,000200# of batches52015# of receiving transactions203550# of products111Components26204

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