In September 2005, Apple Computers unveiled a new version of smaller, sleeker iPods (i.e.

,
digital music players). The new iPod-Nano holds up to 1,000 songs (4-GB) and works with
Macs and PCs. The Nano has a color display and is available at conventional retailers in the
United States for $249.

Apple also offers a 20-GB, standard iPod for $299. Many potential customers have said they
were disappointed that the Nano cost only $50 less than the standard iPod which has more than
five times the storage capacity. Nonetheless, the media hype for the Nano has already exceeded
expectations.

A new division of Apple will manufacture only the Nano (4-GB) and the Standard (20-GB)
iPods. The critical part of the manufacturing process uses a single machine that produces the
color displays on both types of iPods. Traditionally Apple has made production and marketing
decisions based on product profitability. The planned annual financials for each product are
presented in the table below.

iPod-
(All financial data in 000's) iPod-Nano Standard
Sales $49,800 $83,720
Materials $17,000 $35,000
Direct Labor $6,000 $10,000
Variable Overhead Expenses ($26,000 total) ? ?
Fixed Overhead Expenses (32,000 total) ? ?
Selling and Admin Expenses (all fixed) $3,000 $1,000

Units to be Produced and Sold (000's) 200 280

Currently, Apple allocates variable overhead expenses based on direct materials cost and
allocates fixed overhead expenses based on direct labor cost.
1. Using this allocation system, what is the cost and profit of producing the iPod-
Nano and the iPod-Standard? (in total or per unit)
2. What is the breakeven amount for the iPod standard? (number of units or revenue)
Apple wants to reallocate the existing overhead costs to products using recently collected
information with respect to key activities and activity cost drivers. They have the following
three activities and other information

Total Activity
Activity Costs Costs (000's)
Assembling Components $36,000
Setup Production Line $15,000
Repair Machines $7,000

Additional Information about Production Total iPod Nano iPod Standard

Number of Production Runs 1,000 750 250
Number of Setup Hours 8,000 5,000 3,000
Number of Machine Hours 35,000 25,000 10,000
Number of Hourly Employees 160 40 120

Apple has learned the following:

 The cost of assembling components is incurred each time a new production run occurs.
The cost seems unrelated to the number of components within each batch.
 The cost of setting up the machine varies depending on the product and specific
production run. The cost seems to relate to the time it takes to setup the machine.
 Apple has to repair the machines routinely based on the hours that the machine is being
used.

Compute the amount of overhead cost allocated to each product and the profitability of
each product using the activity based costing approach.