Question 3

Halifax Shoes, Inc. makes several types of shoes but two particular models have come to the attention of Marion, senior vice-president of sales. She has noticed that the company recently has been increasing its market share for the high-quality Boomer Boots (BB) but losing market share for the highly competitive Lazy Loafers (LL). Marion found Halifaxs prices were lower than its competitors for BB but slightly higher for LL. She did not understand the reasons for the price differences because all companies use similar production technology.

Halifaxs manufacturing facility has a cutting department and an assembly department. The high-quality BB is produced in small batches (1,000 pairs of shoes each) and the lower-quality LL is produced in larger batches (3,000 pairs each). Marion has asked you, the companys new controller, to analyze the product costing method to see if the product prices should be changed.

The company currently uses a plant-wide cost driver rate based on direct labour hours. Your assistant has provided you with the following additional information about the production of a typical batch of BB and LL: Each batch of BB (1,000 pairs)
Item	Cutting	Assembly	Total
Direct labour hours	80	120	200
Machine hours	80	60	140
Setup hours	3	2	5
Direct costs	$7,500	$6,000	$13,500

Each batch of LL (3,000 pairs)
Item	Cutting	Assembly	Total
Direct labour hours	110	150	260
Machine hours	100	90	190
Setup hours	1	1	2
Direct costs	$12,000	$10,200	$22,200

Your assistant has traced the total support costs of $1,200,000 to the two service departments and the two production departments and has identified the following details for potential cost drivers for the service departments:

Item	Maintenance	Personnel	Cutting	Assembly	Total
Support costs	$405,080	$154,920	$440,000	$200,000	$ 1,200,000
Direct labour hours	0	0	18,000	21,470	39,470
Machine hours	0	0	13,900	10,800	24,700
Setup hours	0	0	340	180	520

Your assistant has also collected the following information on activities and their cost drivers:

Support activities	Cost	Cost driver
Maintenance	$405,080	Total Machine hours
Personnel	154,920	Total Direct labour hours
Cutting supervision	280,000	Setup hours in Cutting
Cutting depreciation	160,000	Machine hours in Cutting
Assembly supervision	160,000	Direct labour hours in Assembly
Assembly depreciation	40,000	Setup hours in Assembly

Required:

1. Determine the costs per pair of BB and LL using a single plant-wide cost driver rate based on direct labour hours.
2. Determine the costs per pair of BB and LL using ABC.
3. Halifax Shoes uses a 120% markup on manufacturing costs to determine their selling prices. Calculate the selling price for each type of shoe based on the current costing method.
4. If the price was changed to reflect the revised ABC costing approach, would there be a significant change? Why do you think market share for BB has been increasing but decreasing for LL?