REQUIRED: Read the case and answer the questions below using the workspaces provided. To receive credit you must show your calculations and write your answers in the spaces provided. Please handwrite...

REQUIRED:
Read the case and answer the questions below using the workspaces provided. To receive credit you must show your calculations and write your answers in the spaces provided. Please handwrite your answers.
YOUR NAME ________________________________________________
YOUR WEBCT USER ID ____________________________________________

CASE FACTS:

Zeus Opticals is a specialist manufacturer of optical instruments. Zeus has recently expanded its core product market of binoculars into making eyepieces for microscopes / telescopes, and screw-on lenses for digital SLR cameras. The firm believes that it makes little money selling binoculars and that these new markets have great profit potential.
Somewhat to Zeus’s surprise, it finds it tough to make money with eyepieces. As of now, the firm is selling the product at a negative profit margin. Yet, Zeus faces intense price pressure in this segment, and thinks that it might have to lower prices by 5% or more to stay competitive. The market for binoculars has been stable for several years, and Zeus expects the trends to continue for the near future. Zeus is most excited about entering the market for screw-on lenses for digital SLR cameras. Although current volumes are small (relatively), Zeus believes that there is substantial market potential for this product. Leveraging its excellent reputation for optics and lenses, Zeus believes that it could reach and sustain two times the current volume of this product. This strategy also seems to make sense financially as this product looks like the most profitable of the three lines, per the firm’s accounting records.
The following table provides key information about the product lines. (Note: All data have been disguised for confidentiality. However, relations among data items have been preserved.)

Eyepieces	Binoculars	Camera Lens
Sales volume (units)	24,000	21,000	7,000
Price	$64.00	$80.00	$150.00
Unit Variable Costs of Licensing & Patent fees	8.00	20.00	25.00
Unit Variable Cost of Direct Labor & Materials	40.00	32.00	80.00
Unit Contribution Margin (before overhead)	$16.00	$28.00	$ 45.00
Unit Profit Margin After Deducting Overhead	($5.00)	$1.75	$10.00
Labor hours / unit	1.2	1.5	2.0

The unit contribution margin is computed by subtracting the units cost of licensing and patent fees and direct labor and materials from the selling price.
Currently, the firm incurs $1,300,250 in overhead costs annually. It allocates this overhead among product lines using the number of labor hours used by each product line.


Required for part




A. Determine the overhead allocation rate which Zeus is currently using to assign overhead costs and then calculate the total cost per unit using that rate. (Hint: if you have done this correctly, then the Price minus the Total Unit Cost should equal the profit per unit reported above for each of the 3 products)

Step 1. Total direct labor hours producing eyepieces? ___1.2______ X _______24000_______ = _________28800___________

Step 2. Total direct labor hours producing binoculars? ____1.5_____ X ____21000__________ = _____31500_____________

Step 3. Total direct labor hours producing camera lens? _____2.0____ X ______7000________ = _____14000__________

Step 4: Total direct labor hours producing all 3 products _________28800__ + _____31500________ + _______14000____ = ____74300__________

Step 5: Overhead rate per direct labor hour: ____13200250__________ divided by ________74300____ = _____17.5________

Step 6: Overhead per unit for eyepieces __________17.5____ X _1.2___________ = ______21_______ Check your answer by subtracting it from the contribution margin per unit. You should get the profit margin per unit Step 7: Overhead per unit for binoculars _____17.5_________ X _________1.5___ = _____26.25________ Check your answer by subtracting it from the contribution margin per unit. You should get the profit margin per unit Step 8: Overhead per unit for camera lens __________17.5____ X ______2.0______ = _____35_______ Check your answer by subtracting it from the contribution margin per unit. You should get the profit margin per unit

Zeus’ management realizes that moving to camera lenses is a major shift in their product and market focus. Plus, they know that factory personnel have complained about the increased coordination required for producing lenses. Thus, management wants us to conduct a more detailed study of product costs.
We collect the following data.

Eyepieces	Binoculars	Camera Lens
Sales volume (units)	24,000	21,000	7,000
Machine hours	2,400	6,000	8,000
batch size	2,000	1,400	500
# of batches	12	15	14
# of Components in each unit of product	2	6	20
# of receiving transactions	15	35	50

Analyzing the overhead, you discover the following:

Item	Amount
Labor related	$302,200
Machine related	352,600
Production order	98,650
First part inspection	75,470
Parts administration	167,500
Inventory management	140,000
Receiving and shipping	57,450
General administration	106,380
Total	$1,300,250

You are wondering how best to allocate these costs into cost pools. You settle on forming a total of six pools.
Pool 1: Labor related costs. Experience shows that for Zeus Optical direct labor hours is what drives these costs and causes them to vary.
Pool 2: Machine related costs. These are driven by machine hours
Pool 3: Cost related to executing a production order (this would include production orders and first part inspections), allocated using the number of batches.
Pool 4: Related to parts administration, which will be allocated based on the number of components in each product
Pool 5: Costs related to inventory management, receiving and shipping. These costs are allocated using the number of transactions per product line (= components × number of transactions).
Pool 6: Facility level costs allocated equally among the 3 product lines.


Requirements of parts B to G.


Now use activity base costing

:


B. Summarize the total amounts in each of the six cost pools and then divide by the cost driver activity (from the data we collected) to determine the per driver unit for each cost pool (except the facility level cost pool has no cost driver so it will not be allocated)

Step 1. Total amounts in the 6 cost pools. In some cases you need to add several numbers. In other cases it is just the given number. Labor related costs =302200 Machine related costs =352600 Production order related costs =174120 Total inventory, receiving and shipping =167500 Parts administration =106380 Facility level =197450

Step 2. Rate per driver unit for Labor related costs (pool 1) _________302200_____ divided by _________74300_____ = ______4.067_________

Step 3. Rate per driver unit for Machine related costs (pool 2) ____352600__________ divided by ____16400__________ = ___21.5____________

Step 4: Rate per driver unit for Production order related costs (pool 3) _174120______________ divided by _____41_________ = ____________4246.83___

Step 5: Rate per product line for parts administration (pool 4) _______167500__________ divided by ___28___________ = ________5982.14_______

Step 6: Rate per driver unit for Inventory, receiving, shipping costs (pool 5) _______197450_________ divided by ____1240__________ = 159.23_______________

Step 7: Rate per product line for facility level costs (pool 6) : = 106380/3=35460

1. 
   Next determine the total amount of overhead allocated to each of the 3 product lines.
   

Total overhead for eyepieces: Pool 1 ________4.067____ X ______28800______ =117129.6 Pool 2 ______21.5_______ X ____2400________ =51600 Pool 3 _____4246.83________ X __12__________ =50961.96 Pool 4 _________5982.14____ X _2____________ = 11964.28 Pool 5 _____________ 159.23X ____30_________ = 4776.9 Pool 6 = 35460 _______________ TOTAL OVERHEAD ALLOCATED TO EYEPIECES = 271892.74

Total overhead for binoculars: Pool 1 ___4.067_________ X ___31500_________ =128110.5 Pool 2 ________21.5_____ X 6000 ____________ =129000 Pool 3 ________4246.83_____ X _15___________ =63702.45 Pool 4 ________5982.14_____ X ____6_________ = 35892.84 Pool 5 _____159.23________ X ___210__________ = 33438.3 Pool 6 =35460 _______________ TOTAL OVERHEAD ALLOCATED TO BINOCULARS =425604.09

Total overhead for camera lens: Pool 1 ____4.067________ X ___14000_________ =56938 Pool 2 _________21.5____ X ___8000_________ =172000 Pool 3 __________4246.83___ X ______14______ =59455.62 Pool 4 ___5982.14__________ X _____20________ = 159230 Pool 5 ___159.23__________ X ________1000_____ = 159230 Pool 6 =35460 ______________ TOTAL OVERHEAD ALLOCATED TO CAMERA LENS=602726.42

D. Now compute the cost per unit of overhead

Product	Total Overhead Allocated	Production in Units	Overhead Cost per Unit
EYEPIECES:	271892.74	24000	11.329
BINOCULARS:	425604.09	21000	20.267
CAMERAL LENS:	602726.42	7000	86.104

E. Now compute the total unit cost and the profit margin per unit using activity based costing.

Product	License & patent fees per unit	Direct materials and labor per unit	Overhead Cost per unit	Total Unit Cost
EYEPIECES:	8	40	11.329	59.329
BINOCULARS:	20	32	20.267	72.267
CAMERAL LENS:	25	80	86.104	191.104

Product	Selling Price	Total Unit Cost	Profit Margin Per Unit
EYEPIECES:	64	59.329	1.08
BINOCULARS:	80	72.267	1.11
CAMERAL LENS:	150	191.104	0.785

NOTE: ANSWERING PARTS F AND G OF ZEUS OPTICALS BELOW
There is no "single" correct answer. Your answers should show some thought and professional presentation. If you are unwilling to be professional in your answer, then we are unwilling to give you full credit. Short phrase, single word scrawled answers will not receive full credit.

F Suppose Zeus were to achieve a level of sales for camera lenses equal to 14,000 units (two times the current level). How would this affect your analysis of the profitability of this product line and what additional information if any would you need in order to improve your analysis?