Question

Walton Sporting Goods Corporation makes two types of racquets, tennis and badminton. The company uses the same facility to make both products even though the processes are quite different. The company has recently converted its cost accounting system to activity-based costing. The following are the cost data that Jane Price, the cost accountant, prepared for the third quarter of 2018 (during which Walton made 69,500 tennis racquets and 29,800 badminton racquets).

   

Direct Cost	Tennis Racquet (TR)				Badminton Racquet (BR)
Direct materials	$	16.60	per unit		$	14.90	per unit
Direct labor		33.50	per unit			27.10	per unit

   

Category	Estimated Cost					Cost Driver	Amount of Cost Driver
Unit level		$	713,000			Number of inspection hours	TR: 15,200 hours; BR: 7,800 hours
Batch level			358,400			Number of setups	TR: 76 setups; BR: 52 setups
Product level			157,500			Number of TV commercials	TR: 4; BR: 1
Facility level			640,000			Number of machine hours	TR: 30,600 hours; BR: 33,400 hours
Total		$	1,868,900

   
Inspectors are paid according to the number of actual hours worked, which is determined by the number of racquets inspected. Engineers who set up equipment for both products are paid monthly salaries. TV commercial fees are paid at the beginning of the quarter. Facility-level cost includes depreciation of all production equipment.

   
Required

1. Compute the cost per unit for each product.

2. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer 1

Solution a:

Computation of Activity rates
Cost driver	Cost	Total activity level	Activity rate
Unit level	$7,13,000	23000	$31.00
Batch level	$3,58,400	128	$2,800.00
Product level	$1,57,500	5	$31,500.00
Facility level	$6,40,000	64000	$10.00
Total	$18,68,900
Computation of Overhead assigned to products
	Tennis Racquet			Badminton Racquet
Activity cost pool	Activity level used	Activity rate	Cost assigned	Activity level used	Activity rate	Cost assigned
Unit level	15200	31.00	$4,71,200.00	7800	31.00	$2,41,800.00
Batch level	76	2800.00	$2,12,800.00	52	2800.00	$1,45,600.00
Product level	4	31500.00	$1,26,000.00	1	31500.00	$31,500.00
Facility level	30600	10.00	$3,06,000.00	33400	10.00	$3,34,000.00
Total Overhead cost assigned			$11,16,000.00			$7,52,900.00
No. of units			69,500			29,800
Overhead per unit			$16.06			$25.27

Computation of Unit Product Cost
	Tennis	Badminton
Direct Materials	$16.60	$14.90
Direct labor	$33.50	$27.10
Overhead Costs	$16.06	$25.27
Cost pe unit	$66.16	$67.27

Solution b:

Selling price badminton racquet = $67.27*130% = $87.45