Chapter C, Problem 3AP

Maxlon Company manufactures custom-made furniture for its local market and produces a line of home furnishings sold in retail stores across the country. The company uses traditional volume-based methods of assigning direct materials and direct labor to its product lines. Overhead has always been assigned using a plantwide overhead rate based on direct labor hours. In the past few years, management has seen its line of retail products continue to sell at high volumes, but competition has forced it to lower prices on these items. The prices are declining to a level close to its cost of production. Meanwhile, its custom-made furniture is in high demand, and customers have commented on its favorable (lower) prices compared to its competitors. Management is considering dropping its line of retail products and devoting all of its resources to custom-made furniture.

Required

1. 1. What reasons could explain why competitors are forcing the company to lower prices on its high-volume retail products?
2. 2. Why do you believe the company charges less for custom-order products than its competitors?
3. 3. Does a company’s costing method have any effect on its pricing decisions? Explain.
4. 4. Aside from the differences in volume of output, what production differences do you believe exist between making custom-order furniture and mass-market furnishings?
5. 5. What information might the company obtain from using ABC that it might not obtain using volume-based costing methods?