STRATEGIC MANAGEMENT

ACCOUNTING

CASE 4-51 : Practical capacity, cost driver rates, and the

death spiral

Presented by :
Bernardus Alan Handoko / 311392
Aya Putri Argatika / 320288
Reza Mediar / 320298
Novi Pastia / 320299

Faculty of Economics and Business

Universitas Gadjah Mada
Yogyakarta

Case 4-51
a)

Plantwide cost driver rate=$ 122,000 /(2,400+1,440+720+320)=$ 25

Overhead cost=$ 25 direct labor hours per unit
Labor cost=$ 30 direct labor hours per unit
Gross Margin per unit :
A
Selling Price
$15.00
Material cost
($4.00)
Labor cost
($7.20)
Overhead
($6.00)
cost
Gross
($2.20)
Margin
Total gross margins:
A

B
$18.00
($5.00)
($5.40)

C
$20.00
($6.00)
($3.60)

D
$22.00
($7.00)
($2.40)

($4.50)

($3.00)

($2.00)

$3.10

$7.40

$10.60

Total

Selling Price

$ 150,000

$
144,000

$120,000

$88,000

$502,000

Materials
Cost

($40,000)

($40,000)

($36,000
)

($28,00
0)

($144,00
0)

Labor Cost

($72,000)

($43,200)

($21,600
)

($9,600)

($146,40
0)

Overhead

($60,000)

($36,000)

($18,000
)

($8,000)

($122,00
0)

Gross
Margin

($22,000
)

$24,800

$44,400

$42,40
0

$89,600

b)

After Youngsborough dropped product A, the plantwide cost driver

rate became:
$ 122,000 / (1,440 + 720 + 320) = $ 49.19 per direct labor hour.
Unit gross margins:
B
C
D
Selling price
Total costs:

$ 18.00

$ 20.00

$ 22.00

Materials
7.00
Direct labor
2.40
Overhead
3.94

$ 5.00

$ 6.00

$ 5.40

$ 3.60

$ 8.85

$ 5.90

$ 19.25
Gross margin
8.66
Total gross margins:

$ (1.25)

B
Selling price
Total costs:
Materials
Direct labor
Overhead
Gross margin

$ 15.50

$ 13.34

$ 4.50

Total

$ 144,000 $ 120,000 $ 88,000

$
$
$
$
$

40,000
43,200
70,839
154,039
(10,039)

$
$
$
$
$

36,000
21,600
35,419
93,019
26,981

$
$
$
$
$

28,000
9,600
15,742
53,342
34,658

$
$
$
$
$

$ 352,000

104,000
74,400
122,000
300,400
51,600

c) After dropping product B, the plantwide cost driver rate is $122,000/(720

+320) = $117.3077 per direct labor hour
Unit gross margins:
C

Selling Price

$20.0
0

$
22.00

Materials Cost

6.0
0

7.0
0

Labor Cost

3.6
0

2.4
0

Overheada

$14.0
8

$
9.38

Total Cost

$23.6
8

$
18.78

Gross Margin

$
(3.68)

$
3.22

$117.3077 per direct labor hour

Total gross margins:

C

Total

$120,00
0

$88,00
0

$208,00
0

Materials
Cost

36,00
0

28,00
0

64,000

Labor Cost

21,60
0

9,60
0

31,200

Overhead

84,46
2

37,53
8

122,00
0

142,06
2

75,1
38

217,20
0

$
(22,062)

$
12,862

$
(9,200)

Selling
Price

Total Cost
Gross
Margin

Now product C appears unprofitable. After dropping product C, the plant

wide cost driver rate is $122,000/320 = $381.25 per direct labor hour

d) We can conclude that from the answer of question a, b, and c that the
company always has the unprofitable part after further dropping what
company thought as unprofitable part/product until Youngsborough had no
products

that appeared profitable,

this means

Youngsborough has

encountered a type of death spiral by using planned levels of direct labor

hours in the denominator for the cost driver rates (the capacity-related
overhead costs are fixed). This case wont happen if Youngsborough had

used practical capacity direct labor hours in the denominator for the cost
driver rate, that way it wont change the cost driver rate when the
company dropped an unprofitable product, so the remaining products
would appear as profitable as they were before.