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A firm uses activity-based costing and has the following activity rates: $100 per machine hours, $500...

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Accounting

A firm uses activity-based costing and has the followingactivity rates: $100 per machine hours, $500 per batch start, $5per order.

The firm has two several products, including the followingtwo.

Product 1: $100,000 revenue, $50,000 direct costs, 250 machinehours, 25 batch starts, 500 orders

Product 2: $95,000 revenue, $40,000 direct costs, 40 machinehours, 16 batch starts, 400 orders

Which of the following process improvements is the MOSTprofitable?

a.

Reduce both product’s batch starts by 25%.

b.

Reduce Product 1’s direct costs by 12.5%.

c.

Reduce Product 2’s orders by 50%.

d.

Reduce machine hour activity rate cost by 25%.

Answer & Explanation Solved by verified expert
3.8 Ratings (517 Votes)

Current Profiablity
Product 1 Product 2
Revenue 100000 95000
Direct Costs 50000 40000
Machine Hour Costs 25000 4000
Batch Starts Costs 12500 8000
Order Costs 2500 2000
Profit 10000 41000 51000
Reduce Batch products start by 25%
Revenue 100000 95000
Direct Costs 50000 40000
Machine Hour Costs 25000 4000
Batch Starts Costs 9375 6000
Order Costs 2500 2000
Profit 13125 43000 56125
Reduce Product 1st Direct Costs by 25%
Revenue 100000 95000
Direct Costs 37500 40000
Machine Hour Costs 25000 4000
Batch Starts Costs 12500 8000
Order Costs 2500 2000
Profit 22500 41000 63500
Reduce Product 2s Order By 50%
Revenue 100000 95000
Direct Costs 50000 40000
Machine Hour Costs 25000 4000
Batch Starts Costs 12500 8000
Order Costs 1250 1000
Profit 11250 42000 53250
Reduce Machine Hour Activity Rate by 25%
Product 1 Product 2
Revenue 100000 95000
Direct Costs 50000 40000
Machine Hour Costs 18750 3000
Batch Starts Costs 12500 8000
Order Costs 2500 2000
Profit 16250 42000 58250

Most Profitable Option is Reduce 1st Products Direct cost by 25%
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