Question

Eastern Chemical Company produces three products. The operating results of the current year are: Product Sales Quantity 1.300.00 6,500.00 650.00 Target Price $ 299.00 302.60 207.50 Actual Price $291.00 260.60 315.00 $ 1.00 (42.00) $187.50 The firm sets the target price of each product at 150% of the product's total manufacturing cost. It appears that the firm was able to sell Product Cat a much higher price than the target price of the product and lost money on Product B. Tom Watson, CEO, wants to promote Product C much more aggressively and phase out Product B. He believes that the information suggests that Product Chas the greatest potential among the firm's three products because the actual selling price of Product C was almost 50% higher than the target price, while the firm was forced to sell Product B at a price below the target price Both the budgeted and actual factory overhead for the current year are $628,500. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are $ 119.40 $ 70.00 Direct materials Direct labor Total prime cost $ 55.00 25.00 $80.00 $33.00 The controller noticed that not all products consumed factory overhead similarly Upon further investigation, she identified the following usage of factory overhead during the year Products Product Number of setups Weight of direct materiais (pounds) Waste and heardous disposals Quality inspections Utilities (eachine hours) Total Total Overhead $ 9.500 143.000 325.000 0.000 71.000 5628,500 2.600 Required: 1 Determine the manufacturing cost per unit for each of the products using the volume based method 2. What is the least profitable and the most profitable product under both the current and the ABC system 3. What is the new target pnce for each product based on 150 of the new costs under the ABC System compare this price with the

Answer 1

1_)	Manufacturing cost per unit for each of the products using volume based method :
		Product A	Product B	Product C
	Materials	$ 55	$ 119.40	$ 70.0
	Labor	$ 25	$ 17	$ 13
	Overhead	$ 103.75    {25*415%}	$ 70.55 {17*415%}	$ 53.95    {13*415%}
	Total cost	$ 183.75	$ 206.95	$ 136.95
	EXPLANATION :
	Predetermined overhead rate = Factory overhead / Total direct labor cost
	Predetermined overhead rate = $ 628,500 / $ 151,450 = 415 % Of direct labor cost
	Total direct labor cost = ( 25 * 1300 )+ (17* 6500 )+ (13*650 ) = $ 151,450

2)	Least profitable and the most profitable product :

	Current cost data	ABC Costing system
Most profitable product	Product C	Product B
Least profitable product	Product B	Product C

EXPLANATION :

2)	Least profitable and the most profitable product :
		Total overhead	Activity Amounts	Activity rate
	Number of setups	$ 9,500	10 setups                                    {2+5+3}	$ 95 per setups {9500/10}
	Weight of direct materials	$ 143,000	1,015 pounds                       {405+255+355}	$ 140.89 per pound
	Waste and hazardous disposal	$ 325,000	115 disposal                            {30+50+35}	$ 2,826.09 per disposal .
	Quality inspections	$ 80,000	115 inspections                    {35+40+40}	$ 695.65 per inspections
	Utilities	$ 71,000	11,400 machine hours {2600+7500+1300}	$ 6.23 per machine hour

Cost allocated to products under ABC :
	Activity rate	Overhead cost allocated to A	Overhead cost allocated to B	Overhead cost allocated to C
Number of setups	$ 95 per setup {9500/10}	$ 190                       {2*$ 95 }	$ 475                      {5*$ 95 }	$ 285                       {3*$ 95 }
Weight of direct materials	$ 140.89 per pound	$ 57,060         {405 * $ 140.89 }	$ 35,927         {255 * $ 140.89 }	$ 50,016         {355 * $ 140.89 }
Waste and hazardous disposal	$ 2,826.09 per disposal .	$ 84,783         { 30* $ 2,826.09 }	$ 141,305         { 50* $ 2,826.09 }	$ 98,913         { 35* $ 2,826.09 }
Quality inspections	$ 695.65 per inspections	$ 24,348         {35 * $ 695.65 }	$ 27,826         {40 * $ 695.65 }	$ 27,826         {40 * $ 695.65 }
Utilities	$ 6.23 per machine hour	$ 16,198         {2600 * $ 6.23 }	$ 46,725         {7500 * $ 6.23 }	$ 8,099         {1300 * $ 6.23 }
Total		$ 182,579	$ 252,258	$ 185,139

Overhead costs allocated to each product using ABC :
	Product A	Product B	Product C
Total overhead costs	$ 182,579	$ 252,258	$ 185,139
Sales quantity	1300	6500	650
Overhead cost per unit	$ 140.45     {182,579/1300}	$ 38.81     {252,258/6500}	$ 284.83     {185,139/650}

Manufacturing cost per unit using ABC :
	Product A	Product B	Product C
Direct Materials	$ 55	$ 119.40	$ 70.0
Direct Labor	$ 25	$ 17	$ 13
Manufacturing overhead	$ 140.45	$ 38.81	$ 284.83
Total cost	$ 220.45	$ 175.21	$367.83
	Product A	Product B	Product C
Actual price	$ 291.0	$ 260.60	$ 315.00
less:Cost using traditional system	($ 183.75)	($ 206.95)	($ 136.95)
Profit	$ 107.25	$ 53.65	$ 178.05
Hence Most profitable product under current system is product C ( $ 178.05 ) while the Least profitable is product B ($ 53.65 )
	Product A	Product B	Product C
Actual price	$ 291.0	$ 260.60	$ 315.00
Less: Total cost	($ 220.45)	($ 175.21)	($367.83)
Profit	$ 70.55	$ 85.39	($ 52.83)
Hence Most profitable product under ABC System is product B ( $ 85.39 ) while the Least profitable is product C (- $ 52.83 Negative )

3)	New target price
		Product A	Product B	Product C
	Product costs:
	Activity system	$ 220.45	$ 175.21	$367.83
	ABC-based product pricing
	Target price	$ 330.68   {220.45*150%}	$ 262.82 {175.21*150%}	$ 551.75   {367.83*150%}
	less: Actual selling price	($ 291.0)	($ 260.60)	($ 315.00)
	Difference in price	$ 39.68	$ 2.22	$ 236.75