Tiana Bonze Case

1.) The total overhead including set-up time is $682,688. The overhead rate is then 4.39 based on total run labor of $155,600. Multiply the rate by the direct labor and you get each overhead costs. Adding the material and direct labor, the product cost is 37.56 for valves, 63.12 for pumps and 56.50 for flow controllers.

2.) Since materials are the only variable costs, the contribution margin for valves is 57.58-16=41.78. For pumps it is 81.26-20=61.26. For flow controllers it is 97.07-22=75.07.

3.) Mary pulled out material related overhead and calculated that based on material used. The material overhead for valves was about 7.68. She also pulled out set up labor which ended up about 0.02 for valves. The overhead ended up being 21.30 for valves bringing it to a product cost of 49.00. For pumps, the product cost was 58.96, and for flow controllers, it was 47.96.

4.) Under ABC, receiving for valves based on transactions is 3% of the total, 19% for pumps and 78% for flow controllers. Materials handling is the same percentages. Packing and shipping is 4% for valves, 23% for pumps and 73% for flow controllers. Engineering estimates 20% for valves, 30% for pumps and 50% for flow controllers. Maintenance and depreciation is 35% for valves, 58% pumps, and 7% flow controllers. This adds up to 37.78 for valves, 48.79 for pumps, and 100.79 for flow controllers.

5.) While the methods are different, the net income would be the same. The calculations are just changing how we perceive each product to cost.

6.)

| Valves | Pumps | Flow Controllers |

Price | 57.78 | 81.26 | 97.07 |

Original cost | 37.56 | 63.12 | 56.60 |

Gross margin | 35% | 22% | 42% |

New cost | 49.00 | 58.96 | 47.96 |

Gross margin | 15% | 27% | 51% |

ABC Cost | 37.78 | 48.79 | 100.76 |

Gross margin | 35% | 40% | -4% |

The ABC method explains why Tijuana questions how the competitors could sell pumps for as low as they currently do. It also explains why the increase...