Southwest Auto Parts has a Seat Manufacturing Department

Southwest Auto Parts has a Seat Manufacturing Department that uses activity-based costing. SOUTHWEST’s system has the following activities:


Allocation Base

Cost Allocation Rate


Number of purchase orders

$50.00 per purchase order


Number of parts

$0.50 per part


Number of finished seats

$1.00 per finished seat

Each auto seat has 20 parts. Direct materials cost per seat is $1. Direct labor cost per seat is $10. Suppose Lexus RX300 has asked SOUTHWEST for a bid on 50,000 built-in baby seats that would be installed as an option on some Lexus RX300. SOUTHWEST will use a total of 200 purchase orders if Lexus RX300 accepts SOUTHWEST’s bid.


1. Compute the total cost SOUTHWEST will incur to (a) purchase the needed materials and then (b) assemble and (c) package 50,000 baby seats. Also, compute the average cost per seat.

2. For bidding, SOUTHWEST adds a 30% markup to total cost. What total price will SOUTHWEST bid for the entire Lexus RX300 order?

3. Suppose that instead of an ABC system, SOUTHWEST has a traditional product costing system that allocates indirect costs other than direct materials and direct labor at the rate of $65 per direct labor hour. The baby-seat order will require 10,000 direct labor hours. What price will SOUTHWEST bid using this system’s total cost?

4. Use your answers to Requirements 2 and 3 to explain how ABC can help SOUTHWEST make a better decision about the bid price to offer Lexus RX300.

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