Answer:
<em>The contract A yields a loss under ABC but Contract B yields a profit.</em>
<em>ABC Profit contract A $ (3000) contract B $ 11250</em>
<em>Under absorption costing both contract yield profits.</em>
<em>Absorption Profit contract A $ 3250 contract B $7500 </em><em> </em>
<em>Management should make decisions using ABC and reject Contract A and accept Contract B.</em>
<em></em>
Explanation:
Customer AAA BBB
Component Type A999 B999
Contract Value ($) $27,000 $100,000
Contract Quantity 1,000 unit 2,000 unit
Material cost/unit $15 $20
Molding time/batch 5 hours 7.5 hours
Batch size 100 units 50 units
Activity Based Rate= Cost per Unit of Cost Driver
Activity Cost driver Cost Rate
Molding 2,000 $150,000 $150,000 / 2,000 = 75
Inspection 150 $75,000 $75,000/150 = 500
<u>Production 20 $125,000 $125,000/20= 6250 </u>
<u>Total $ 350,000 </u>
<u />
<u>Cost Drivers Consumed</u>
<u>Activity</u> A999 B999
Molding time/batch 5 hours* 10 7.5 hours *40
50 300
Batch size 1,000 unit/ 100 units 2,000 unit/50 units
= 10 =40
ABC Profits for Each Contract
A999 B999
Selling Price $27,000 $100,000
Materials 15*1000 20 * 2000
= 15000 = 40,000
Molding 50 hours *75 300* 75
3750 22500
Inspection 10 batches *500 40 batches *500
$ 5000 $ 20000
Management Contracts $ 6250 $ 6250
<u>Total $ 30,000 $ 88,750</u>
<u>Profit $ (3000) $ 11250</u>
<u></u>
<u>Overhead Rate Absorption Costing</u>
Total Overheads= ( 150,000 + 125,000+ 75000) = $ 350000
Annual Molding Hours = 2000
<u>Rate= $ 350,000/2000=$ 175 per molding hour</u>
<u></u>
<u>Absorption Costing </u>
<u>Profit For each Contract</u>
<u></u>
A999 B999
Selling Price $27,000 $100,000
Materials 15*1000 20 * 2000
= 15000 = 40,000
Overheads 50 hours *175 300 Hours *175
= 8750 = 52,500
<u>Total Cost 23750 92500 </u>
<u>Profit 3250 7500 </u>
<u></u>
<em>The contract A yields a loss under ABC but Contract B yields a profit.</em>
<em>Under absorption costing both contract yield profits.</em>
<em>Management should make decisions using ABC and reject Contract A and accept Contract B.</em>