Rodent Corp: ABC Costing

Rodent Corp. produces two types of mice, wired (low-cost and low sales price) and wireless ones
(more sophisticated, sold at higher price). Sales of the new wireless version have been
increasing steadily, yet total profit has been declining. This was all the more disturbing because
the accounting system has shown the wireless mice to be more profitable than the wired ones.
Total annual overhead cost was $1,320,000 and product-specific data were as follows:

  Wired Wireless Total

Output (units) 320,000 100,000
Unit price ($) 11.00 20.00
DL ($1,000) 1,044 396 1,440
DM ($1,000) 750 684 1,434

Required:

1. Traditionally, Rodent has allocated overhead on the basis of direct labor dollars. Compute
the total per-unit costs for each product and the resulting profit margins as given by:
(Price-Unit Cost) / Price. Which product appears more profitable?

2. Now suppose Rodent has analyzed its $1,320,000 total overhead costs in more detail and
found that they can be divided into three activity areas:
 Production scheduling: the cost driver is the number of production runs;
 Quality testing: the cost driver is the number of tests performed;
 Shipping: the cost driver is the number of shipments.
The following data apply to the three activity areas:

Drivers used Drivers used

Cost pools Costs # of Drivers by Wired by Wireless
1) Production scheduling 600 50 prod. runs 40 10
2) Quality testing 540 30 tests 12 18
3) Shipping 180 150 shipments 100 50
1320

Allocate the $1,320,000 overhead cost to the two products based on the above activity
information. Again, compute the respective profit margins and compare the result with
that of part 1 above.