Several years after reengineering its production process,

ZippyZippy

Corporation hired a new controller,

Jane SmithJane Smith.

She developed an ABC system very similar to the one used by

ZippyZippy's

chief rival,

SouthstreamSouthstream.

Part of the reason

SmithSmith

developed the ABC system was because

ZippyZippy's

profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system,

ZippyZippy

had used a plantwide overhead rate based on direct labor hours that was developed years ago.

Manufacturing Overhead Costs per Unit

Standard

Deluxe

ABC costs. . . . . . . . . . . . . . . .

$199.50

$372.50

Plantwide overhead rate. . . . . .

$237.60

$334.40

The following data are budgeted for the company's Standard and Deluxe models for next year:

Standard

Deluxe

Sales price per wheel. . . . . . .

$490.00

$640.00

Direct materials per wheel. . . .

$33.00

$46.25

Direct labor per wheel. . . . . . .

$45.20

$51.00

1.

Compute the gross profit per wheel if managers rely on the ABC unit cost data.

2.

Compute the gross profit per wheel if the managers rely on the plantwide allocation cost data.

3.

Which product line is more profitable for

ZippyZippy?

4.

Why might the controller have expected ABC to pass the cost-benefit test? Were there any warning signs that

Zippy'sZippy's

old direct-labor-based allocation system was broken?
    • 4 years ago
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