Back Porch Company Manufactures Lawn Chairs Using an Activity-Based Costing

question 85

Multiple Choice

Back Porch Company manufactures lawn chairs using an activity-based costing system to allocate all manufacturing conversion costs.The following information is provided for the month of June:

Each lawn chair consists of 8 parts;the total direct materials cost per pillow is $10.00.
If the cost to purchase the same lawn chair from a supplier is $35.00,what should Back Porch do to maximize profits?

• A)Purchase the lawn chair from the supplier.
• B)Continue to manufacture the lawn chair.
• C)Since the cost to manufacture the lawn chair is also $32.20,the company would make the same profit whether it bought the lawn chair or manufactured it.
• D)Close down the business.

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Definitions:

Units-Of-Activity

A depreciation method that allocates cost based on the actual usage, work performed, or units produced by an asset.

Asset’s Use

The utilization of an asset in a way that enhances its value or contributes to earning revenue.

Manufacturing Company

A company that uses raw materials, labor, and equipment to produce finished goods on a large scale.

Productivity

The measure of the efficiency of production, often evaluated as the ratio of outputs to inputs in a manufacturing or service process.