(Solution) - Alaire Corporation manufactures several different circuit boards -(2025 Original AI-Free Solution)

Paper Details

Alaire Corporation manufactures several different circuit boards, but two of the boards account for the majority of the company's sales. The first product, a television (TV) circuit board, has been a standard in the industry for several years. The market for this board is competitive and price sensitive. Alaire plans to sell 65,000 of the TV boards in 2010 at $150 per unit. The second product, a personal computer (PC) circuit board, is a recent addition to Alaire's product line. Because it incorporates the latest technology, it can be sold at a premium price. The 2010 plans include the sale of 40,000 PC boards at $300 per unit. Alaire's management group is meeting to discuss strategies for 2010. The current topic of conversation is how to spend the sales and promotion dollars for 2010. The sales manager believes that the market share for the TV board could be expanded by concentrating Alaire's promotional efforts in this area. In response to this suggestion, the production manager said, "Why don't you go after a bigger market for the PC board? The cost sheets that I get show the contribution from the PC board is about double the contribution from the TV board. I know we get a premium price for the PC board; selling it should help overall profitability." Alaire's current volume-based costing system shows these data for TV and PC boards:

The current costing system uses three types of factory overhead: variable overhead, materials handling, and machine time. Variable factory overhead is applied on the basis of direct labor-hours. For 2010, Alaire budgeted $1,120,000 variable factory overhead and 280,000 direct labor-hours. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a materials-handling charge of 10 percent of direct materials cost, which is not included in variable factory overhead. Total 2010 expenditures for direct materials are budgeted at $10,800,000.
The company conducted an activity analysis and collected the following information for 10 activities:



Ed Welch, Alaire's controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. As Ed explained to the group, "Activity-based costing integrates the cost of all activities, known as cost drivers, into individual product costs rather than including these costs in overhead pools." He prepared the preceding information to help the management group understand this concept. "Using this information," Ed explained, "we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct materials. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures."

Required
1. On the basis of Alaire's current costing system and its cost data (direct materials, direct labor, materialshandling charge, variable overhead, and machine time overhead) given in the problem, calculate the total contribution margin expected in 2010 for Alaire Corporation's TV board and PC board.
2. On the basis of activity-based costs, calculate the total contribution margin expected in 2010 for Alaire Corporation's TV board and PC board.
3. Explain how the comparison of the results of the two costing methods might affect the sales, pricing, and promotion decisions made by Alaire Corporation's management group. How would it affect the strategic, competitive position of thefirm?