1. When is the use of Activity-Based Costing most useful (find three reasons given in the case and repeat them). 2.Compute the ratio of overhead for each process (fabrication, assembly and packing and shipping) to direct labor dollars. Use Exhibit II totals (highlighted in blue). Notice that these totals include both manufacturing costs that are directly traceable to each process as well as the redistributed quality control costs that are reallocated (this has been done for you on Exhibit II). Answer the following questions: How many pools are there? How were the dollar amounts allocated to each pool (see second full paragraph on page 47)? How are the pool costs allocated to the product lines (bottom of page 47 and top of 48)? How is this different from what they were doing previously? Given the information in the case, what else do you think should be done (more cost pools?? different cost drivers??). To help you evaluate the number of pools, what % of the total overhead is in each pool? Do you see room for improvement? In terms of cost drivers, review the 3 processes on page 46. What do you think drives the costs in each process? Is it direct labor costs? 3. Compute the product costs and recreate the monthly budget based on budgeted quantity. 4. Recreate the 2-Factory Costing Model (ABC Costing 4-pools) from Exhibit V and update the question marks (order costs). The 2-Factory Costing model uses updated costs including the $70,000 in extra cost that was incurred during the 2008 year. 5. Compute BE quantities for each product line. Are both product lines breaking even? Compute the margin of safety in units and in dollars. 6. Compare the old to the new costs and profitability. What price changes could be made to maintain the same profit margin as previously budgeted? Calculate the change in volume necessary to generate the same contribution margin in total for each product line. Calculate the price elasticities. Are these changes in volume reasonable? Interpret the elasticities and relate to the case. 7. Assume that you know that the elasticities are -2.50 for RC1 and -0.50 for RC2. Use Goal Seek to determine the new projected volume (row 19) that should be budgeted given these elasticities. Go to DATA, WHAT IF ANALYSIS and select GOAL SEEK. Type in the following information as shown below (you need to run it twice). 8. Assume management decides to change the price for RC1 to $18.77 and for RC 2 to $26.04, and the total product costs are as given in tab 4, for the 4th pool. What is the optimal product mix (to maximize the total profit (in green)? Assume the following constraints: Max Volume for RC1 = 117,229 (quantity found on Goal Seek Tab) Max Volume for RC2 = 75,193 (quantity found on Goal Seek Tab) Min Volume for RC 1 = 90,000 units Min Volume for RC 2 = 30,000 units Total Max Volume = 190,000 units

Fig: 1