MEMC manufactures electric motors for commercial use.

The company produces three models, designated as Standard, Delux

the past 25 years. Product cost and annual sales data are as follows.

Standard Deluxe Heavy Duty

Annual Sales (units) 20000 1000 100000
Product Cost
Raw Materials $ 10.00 $ 25.00 $ 42.00
Direct Labour $ 10.00 $ 20.00 $ 20.00
0.5 hrs @ 1 Hr @$20 1hr @ $20
Manufacturing Overhead* $ 85.00 $ 170.00 $ 170.00
$ 105.00 $ 215.00 $ 232.00

Calculation of predtermined overhead rate

Manufacturing Overhead Budget
Depreciation machinry
Maintenance machinary
Depreciation, insurance and taxes for factory
Engineering
Purchasing, receiving and shipping
inspection and repair of defects
Material Handling
Miscellaneous Manufacturing Overheads
Total

Direct Labour Budget

Standard Model 10000 Hrs
Deluxe Model 1000 Hrs
Heavy Duty Model 10000 Hrs
Total 21000

Pre determined Overhead rate $ 170.00

For the past 10 years company's pricing formula was to set the target price at 110% of the total producion cost for each model
the standard model was reduced to $110.
The Company's president recently asked the controller, "Why can't we compete with these other companies? They are selling m
Intreged by these questions, controller decided to find out the answers. First, he compiled the details of the activities and deci

Product Lines
Activity Cost Pool Cost Drivier Standard Model
Depreciation machinry Machine Time 40%
Maintenance machinary Machine TIme 40%
Enggineering Engg Hours 47%
Inspection and repair of defects Engg Hours 47%
Purchasing, receiving and Shipping material handlin Number of material orders 47%
Depreciation, taxes and insurance for factory Factory Space usage 42%
Miscellaneous Manufacturing overheads Factory Space usage 42%
Compute the target price for three models based on treditional costing system
Compute the new target price based on the information collected
What strategic options does the company have??
e models, designated as Standard, Deluxe and Heavy-duty. The company uses Job order costing with manufacturing overheads applied on t

Traditional Costing
Standard Deluxe Heavy Duty
Annual Sales (units) 20000 1000 100000
Product Cost
Raw Materials $ 10.00 $ 25.00 $ 42.00
Direct Labour $ 10.00 $ 20.00 $ 20.00
0.5 hrs @ 1 Hr @$201hr @ $20
Manufacturing Over $ 85.00 $ 170.00 $ 170.00
Total Cost $ 105.00 $ 215.00 $ 232.00
Profit $ 10.50 $ 21.50 $ 23.20
Selling price $ 115.50 $ 236.50 $ 255.20
$ 1,480,000.00 FIXED
$ 120,000.00 FIXED
$ 300,000.00 FIXED
$ 350,000.00
$ 250,000.00 Consider as
$ 375,000.00 variable
$ 400,000.00
$ 295,000.00 FIXED
$ 3,570,000.00

the total producion cost for each model. Recently, however, the standard model motor has come under increasing pricing pressure from o

hese other companies? They are selling motors just like our standard model for $106. That is only a buck more than our production cost. A
iled the details of the activities and decided to look at the cost from the activities side

Deluxe Model Heavy Duty Model

13% 47%
13% 47%
6% 47%
6% 47%
8% 45%
15% 43%
15% 43%
with manufacturing overheads applied on the direct labour hours. The system has been in place with little change over

Activity Based Costing

Standard Deluxe Heavy Duty
Annual Sales (units) 20000 1000 100000
Product Cost
Raw Materials $ 10.00 $ 25.00 $ 42.00
Direct Labour $ 10.00 $ 20.00 $ 20.00
0.5 hrs @$20 pe1 Hr @$20 1hr @ $20
Overheads
Depreciation $ 592,000.00 $ 192,400.00 $ 695,600.00
Maintenance Machi $ 48,000.00 $ 15,600.00 $ 56,400.00
Depreciation, insura $ 126,000.00
Engineering $ 164,500.00
Purchasing, receivin $ 117,500.00
inspection and repai $ 176,250.00
Material Handling $ 188,000.00
Miscellaneous Manu $ 123,900.00
$ 1,536,150.00
Production 20000
$ 76.81
Total Cost $ 96.81 437.75 226.11
$ 106.49 $ 481.53 $ 248.72
(SUM(N13:N17)/1000)+20+25
Total Variable Cost $ 646,250.00
Variable cost per uni $ 32.31
Total Variable Cost p $ 52.31

e under increasing pricing pressure from offshore competition. The result was that now the price on

y a buck more than our production cost. Are we really that inefficient? What gives?"