ACTIVITY RESOURCE USAGE MODEL, STRATEGIC ELEMENTS, AND RELEVANT COSTING
Perkins Company has idle capacity. Recently, Perkins received an offer to sell 2,000 units of one of its products to a new customer in a geographic region not normally serviced.
The offering price is $10 per unit. The product normally sells for $14. The activity based accounting system provides the following information:
|
|
|
|
|
Activity Rate |
|
|
|
|
Unused |
Quantity |
|
|
|
|
Cost Driver |
Capacity |
Demanded |
Fixed |
Variable |
|
Direct materials |
Units |
0 |
2,000 |
— |
$3.00 |
|
Direct labor |
Direct labor hours |
0 |
400 |
— |
7.00 |
|
Setups |
Setup hours |
0 |
25 |
$50.00 |
8.00 |
|
Machining |
Machine hours |
6,000 |
4,000 |
4.00 |
1.00 |
Although the fixed activity rate for setups is $50 per hour, any expansion of this resource must be acquired in blocks. The unit of purchase for setups is 100 hours of setup servicing. Thus, any expansion of setup activity must be done 100 hours at a time. The price per hour is the fixed activity rate.
Required:
1. Compute the change in income for Perkins Company if the order is accepted. Comment on whether or not the order should be accepted. (In particular, discuss the strategic issues.)
2. Suppose that the setup activity had 50 hours of unused capacity. How does this affect the analysis?