Littell Lamp Company is noted for its full line of quality lamps. The company operates one of its plants in Green Bay, W

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Littell Lamp Company Is Noted For Its Full Line Of Quality Lamps The Company Operates One Of Its Plants In Green Bay W 1 (110.42 KiB) Viewed 26 times

Littell Lamp Company is noted for its full line of quality lamps. The company operates one of its plants in Green Bay, Wisconsin. That plant produces two types of lamps: classical and modern. The classical lamp sells for $5 while the modern lamp sells for $10. The president of the company recently decided to change from a unit-based, traditional costing system to an activity-based costing system. Before making the change companywide, the president wants to assess the effect on the estimates of product profitability for the Green Bay plant. This plant was chosen because it produces only two types of lamps. Most other plants produce at least a dozen. The product profit margin income statement under the traditional absorption machine-hours based system is the following: Traditional System Classical Modern Total per unit per unit product total $2,000,000 product total $1,000,000 Revenues $5.00 $10.00 $3,000,000 Direct Labor and Material Costs $800,000 $2.00 $150,000 $1.50 $950,000 MOH $1,600,000 $4.00 $400,000 $4.00 $2,000,000 Product Profit Margin ($400,000) ($1.00) $450,000 $4.50 $50,000 SG&A expenses $300,000 Operating Profit ($250,000) To assess the effect of the change to an activity-based costing system, the following data have been gathered: Activity Machining Setup Activity Cost Driver (machine) hours # of setups Classical (cost driver consumption) 85,000 hours 50 setups Modern (cost driver consumption) 40,000 hours 100 setups Activity Capacity 150,000 hours 175 setups Total Dollar Amount $500,000 $1,500,000 Requirements: 1. Reconstruct the product profit margin income statement using an activity-based costing system. (Mimic the income statement presented above, but add the new line items). Be sure to include the individual and total product profit margins along with total operating income. You do not need to provide per unit information. (15 points. Partial credit will be awarded for correct calculations of line items on the income statement.) 2. Based on the activity-based costing report, the president of Littell is convinced that the best course of action is to drop the Modern model immediately. You delve deeper into the matter and find that none of the machine costs would be avoided if the Modern lamp were dropped. However, 50% of the setup costs could be avoided by immediately reducing the setup capacity by 50% (assume that sales and direct costs of the Classical model are unaffected by this decision and will be as stated at the beginning of the problem.) What will total operating profits be after dropping the Modern model? (5 points. No partial credit.)