Solved: Lenngton Furniture Inc LFI manufactures bedroom

furniture in

Lenngton Furniture, Inc. (LFI) manufactures bedroom furniture in sets (a set includes a dresser,
two queen-size beds, and one bedside table) for use in motels and hotels. LFI has three
customer groups, which it calls the value, quality, and luxury groups. The value products are
targeted to low-price motels that are looking for simple furniture, while the luxury furniture is
targeted to the very best hotels. The value line is attractive to a variety of hotels and motels that
appreciate the combination of quality and value. Currently there has been a small increase in
the low-cost and value lines, and an appreciable increase in demand in the luxury line, reflecting
cyclical changes in the marketplace. Luxury hotels are now in more demand for business travel,
while a few years ago, the value segment was the most popular for business travelers. LFI
wants to be able to respond to the increased demand with increased production but worries
about the increased production cost and about price setting as its mix of customers and
production change. LFI has used a volumebased rate based on direct labor-hours for some
time. Direct labor cost is $12 per hour.

The budgeted production data for the three product lines follows.

Required
1. Determine the cost per set and the total production cost of each of the three customer groups
using activity-based costing.
2. Determine the production cost for each of the three customer groups using LFI’s current
volume-based approach.
3. The activity usage data given in the problem reflects current usage of the various cost drivers
to manufacture the firm’s product lines. Suppose you are given the following information
regarding the firm’s practical capacity for each of these activities, as follows:
Cost Driver Practical Capacity
Number of parts ........ 990,000
Number of production orders ... 800
Number of setups ......... 200
Machine-hours .......... 100,000
Direct labor-hours ........ 123,900
Number of orders shipped ..... 5,000
Comment on how you would use this additional information for costing the firm’s products and
assisting in strategic planning.
4. Compare the two approaches and discuss the strategic and competitive issues of using each
of the twomethods.

ANSWER

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