Primeaux Sprinklers Mini-case: Activity Based Costing (10.

35 adapted)

Primeaux Sprinklers manufactures a number of different kinds of sprinklers in three broad product lines.
The following table provides relevant information about the product lines.
Hand Held Lawn Estate Total Company
Units 1,000,000 2,000,000 40,000 3,040,000
Price per unit $9.00 $8.50 $15.00
Direct costs per unit $2.00 $4.00 $4.50
Labor hours per unit 2.2 hours 1.9 hours 2.1 hours
Batch size 10,000 units 5,000 units 1,000 units 16,000
Total labor hours 2,200,000 3,800,000 84,000 6,084,000
Total batches 100 400 40 540

Currently, Primeaux incurs total overhead of $12,776,400 per year and allocates it to individual products
using labor hours as the allocation basis. For the purposes of this problem, assume that all of the
overhead is variable (VOH).

1. What is each product’s contribution margin per unit under the current method for allocating
overhead costs? Don’t forget that you need to compute the allocation rate in order to allocate overhead
to the products.

Current allocation rate is $2.10/DLH ($12,776,400 / 6,084,000 DLHs)

Hand Held Lawn Estate

Units 1,000,000 2,000,000 40,000
Price per unit $9.00 $8.50 $15.00
Direct costs per unit $2.00 $4.00 $4.50
VOH per unit 2.2 hours*2.1 1.9 hours*2.1 2.1 hours*2.1
= $4.62 = $3.99 = $4.41
Contribution Margin $2.38/unit $.51/unit $6.09/unit
2. Primeaux’s Marketing VP wants to expand the sales of Estate sprinklers and de-emphasize Lawn
sprinklers. However, the plant manager disagrees with this strategy. They’ve asked you, a recent MBA
graduate, to refine the product cost estimates in order to help them decide what to do. You find that
$7,300,800 of the overhead is labor related and the remainder is related to the number of batches run.
In light of this information, what is each product’s contribution margin per unit? Note that because ABC
is not unit-driven, you will have to compute a contribution margin income statement for each product
line, and then divide by number of units.

 Form cost pools and determine the dollar amount for each cost pool and determine the
denominator volume for each cost pool and compute the cost driver rate:
o Pool #1: Labor ($7,300,800 / 6,084,000 DLHs = $1.20 per DLH)
o Pool #2: Batches ($5,475,600 / 540 batches = $10,140 per batch)

 Allocate each cost pool to the product lines.

 Prepare a contribution margin income statement for each product line. I’ve started it for you:
Hand Held Lawn Estate
Revenue $9,000,000 $17,000,000 $600,000
Direct VC $2,000,000 $8,000,000 $180,000
2.2M DLHs * $1.20 = 3.8M DLHs * $1.20 = 84,000 DLHs * $1.20 =
VOH - labor $2,640,000 $4,560,000 $100,800
$10,410 * 100 = $10,410 * 400 = $10,410 * 40 =
VOH - batch $1,014,000 $4,056,000 $405,600
$3,346,000 $384,000 ($86,400)
Contribution Margin
Units 1,000,000 2,000,000 40,000
$3.35 $.19 ($2.16)
CM per unit