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Koontz Company manufactures two models of industrial componentsa Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontzs controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):

	Basic			Advanced			Total
Number of units produced and sold		20,000			10,000		30,000
Sales	$	3,000,000		$	2,000,000	$	5,000,000
Cost of goods sold		2,300,000			1,350,000		3,650,000
Gross margin		700,000			650,000		1,350,000
Selling and administrative expenses		720,000			480,000		1,200,000
Net operating income (loss)	$	(20,000	)	$	170,000	$	150,000

Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the companys Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:

	Molding			Assemble and Pack			Total
Manufacturing overhead costs	$	787,500		$	562,500	$	1,350,000
Direct labor hours:
Basic		10,000			20,000		30,000
Advanced		5,000			10,000		15,000
Machine hours:
Basic		12,000			-		12,000
Advanced		10,000			-		10,000

Required:

2. Using a departmental approach:

c. Using your departmental overhead cost allocations, redo the controllers segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).

3. Koontzs production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the companys total manufacturing overhead cost to five activity cost pools as follows:

Activity Cost Pool	Activity Measure	Manufacturing Overhead
Machining	Machine-hours in Molding	$	417,500
Assemble and pack	Direct labor hours in Assemble and Pack		282,500
Order processing	Number of customer orders		230,000
Setups	Setup hours		340,000
Other (unused capacity)			80,000
		$	1,350,000

She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model.

The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the companys selling and administrative costs are organization-sustaining in nature. Using the additional information provided by the production manager, calculate:

a. An activity rate for each activity cost pool.

b. The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach.

c. The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.

4. Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 7-8. (Hint: Organize all of the companys costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)

5. Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.

Using your departmental overhead cost allocations, redo the controllers segmented income statement (continue to allocate selling and administrative expenses based on sales dollars). (Round your intermediate calculations to 2 decimal places.)

2C

Basic Advanced Sales $3,000,000selected answer correct $2,000,000selected answer correct Cost of goods sold 150,000selected answer incorrect 200,000selected answer incorrect Gross margin 150,000selected answer incorrect 200,000selected answer incorrect Selling and administrative expenses 300,000selected answer incorrect 400,000selected answer incorrect Net operating income not attempted not attempted

Calculate an activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

3A
	Activity Cost Pool Activity Rate Machining $18.98selected answer correct per MH Assemble and pack $9.42selected answer correct per DLH Order processing $2.30selected answer incorrect per order Setups $1.31selected answer incorrect per hour

Calculate the total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach. (Round your intermediate calculations to 2 decimal places.)

3B
	Basic Advanced Machining $12,000selected answer incorrect not attempted Assemble and pack not attempted not attempted Order processing not attempted not attempted Setups not attempted not attempted Total overhead cost assigned $12,000 $0

Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement. (Round your intermediate calculations to 2 decimal places.)

4

Koontz Company Income statement Total Basic Advanced Salesselected answer correct $5,000,000selected answer correct $3,000,000selected answer correct $2,000,000selected answer correct Variable expenses: Direct materialsselected answer correct not attempted 800,000selected answer correct 600,000selected answer correct Direct laborselected answer correct not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Total variable expenses not attempted 800,000 600,000 not attempted not attempted 2,200,000 1,400,000 Traceable fixed expenses: not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Total traceable fixed expenses not attempted 0 0 Segment margin not attempted $2,200,000 $1,400,000 Common fixed expenses: not attempted not attempted not attempted not attempted not attempted not attempted not attempted not attempted Total common fixed expenses 0 not attempted $0

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