Question

"Hot Tech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers) that contribute to overhead costs:

1. Machine setup
2. Inspection and testing
3. Materials handling
4. Production scheduling
5. Quality control

Answer 1

Using activity-based costing principles, the firm should select production technology 3, considering its lowest total cost with rising wages and constant machine costs. This decision demonstrates the necessity to adapt production techniques in response to fluctuating labor and equipment expenses to maintain cost-effectiveness.

Step-by-step explanation:

In light of activity-based costing and given scenarios where the cost of labor and machines vary, the firm should choose production technology 3 when it offers the lowest total cost. This selection aligns with economic efficiency as cheaper machine hours would logically prompt a shift towards utilizing more machinery and reducing labor to save on costs. In Example A, with wages at $40 and machine costs at $80, technology 1 emerges as the most cost-effective.

However, as wages increase to $55 in Example B and further to $90 in Example C, while machine costs remain stable, the most economical option transitions from technology 1 to technology 2, and ultimately to technology 3. The evaluation and choice of production technology are pivotal in controlling overhead costs, such as those related to machine setup, inspection and testing, materials handling, production scheduling, and quality control—all foundational aspects of activity-based costing.