Question

Eastern Chemical Company produces three products. The operating results of the current year are:

Product	Sales Quantity			Target Price			Actual Price			Difference
A		1,950.00		$	303.00		$	304.00		$	1.00
B		9,750.00			315.60			273.60			(42.00	)
C		975.00			220.50			328.00		$	107.50

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 C at 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 C has 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 $887,100. 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:

	Product A				Product B				Product C
Direct materials	$	68.00			$	132.40			$	83.00
Direct labor		38.00				30.00				19.50
Total prime cost	$	106.00			$	162.40			$	102.50

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:

	Product A			Product B			Product C			Total Overhead
Number of setups		5			8			6		$	8,100
Weight of direct materials (pounds)		418			268			368			214,500
Waste and hazardous disposals		43			63			48			487,500
Quality inspections		48			53			53			93,000
Utilities (machine hours)		3,900			8,800			1,950			84,000
Total										$	887,100

Required:

Complete this question by entering your answers in the tabs below.

Determine the manufacturing cost per unit for each of the products using the volume-based method. (Round your intermediate calculations and final answers to 2 decimal places.)

	Product A Product B Product C Materials Labor Overhead Total cost $0.00 $0.00 $0.00

2. What is the least profitable and the most profitable product under both the current and the ABC systems?

	Current Cost Data ABC Costing System Most profitable product Least profitable product

3. What is the new target price for each product based on 150% of the new costs under the ABC system? Compare this price with the actual selling price. (Round your intermediate calculations and final answers to 2 decimal places.)

	Product A Product B Product C Product costs: Activity system ABC- based product pricing: Target price Actual selling price Difference in price $0.00 $0.00 $0.00

Answer 1

1.Manufacturing Cost per unit of products using volume based method
Total manufacturing overhead costs = $ 887,100
Direct Labour cost for products are :
	Per unit Cost	Quantity	Total Cost
Product A	38	1,950.00	74,100.00
Product B	30	9,750.00	2,92,500.00
Product C	19.5	975.00	19,012.50
	Total Labour Cost		3,85,612.50
Allocation of man. Overhead in proportion of direct labour cost
	Total			Volume	Per unit
Product A	1,70,467	(887,100*74,100/385,612.5)		1,950.00	87.42
Product B	6,72,895	(887,100*292,500/385,612.5)		9,750.00	69.01
Product C	43,738	(887,100*19,012.5/385,612.5)		975.00	44.86
	8,87,100
	Product A	Product B	Product C
Materials	68.00	132.40	83.00
Labour	38.00	30.00	19.50
Overhead	87.42	69.01	44.86
Total Cost per unit	193.42	231.41	147.36
2. Most and least Profitable product
Under Current System
	Actual Price	Cost	Profit	Profit % on Cost
Product A	304.00	193.42	110.58	57.17%
Product B	273.60	231.41	42.19	18.23%
Product C	328.00	147.36	180.64	122.58%
Most Profitable under Current System				Product C
Least Profitable under Current System				Product B
Under ABC Costing
Allocation of overhead costs :
Activity		Total Cost	Total Driver	Cost/Driver
Number of setups		8,100	19.00	426.32
Weight of direct materials (pounds)		2,14,500	1,054.00	203.51
Waste and hazardous disposals		4,87,500	154.00	3,165.58
Quality inspections		93,000	154.00	603.90
Utilities (machine hours)		84,000	14,650.00	5.73
			Product A		Product B		Product C
		Cost/Driver	Driver	Cost	Driver	Cost	Driver	Cost
Cost Driver		426.32	5	2,131.58	8	3,410.53	6	2,557.89
Number of setups		203.51	418	85,067.36	268	54,540.80	368	74,891.84
Weight of direct materials (pounds)		3,165.58	43	1,36,120.13	63	1,99,431.82	48	1,51,948.05
Waste and hazardous disposals		603.90	48	28,987.01	53	32,006.49	53	32,006.49
Quality inspections		5.73	3,900	22,361.77	8,800	50,457.34	1,950	11,180.89
Utilities (machine hours)				2,74,667.86		3,39,846.97		2,72,585.17
Total Costs
Volume (Units)				1,950.00		9,750.00		975.00
Cost/Unit				140.86		34.86		279.57
	Product A	Product B	Product C
Materials	68.00	132.40	83.00
Labour	38.00	30.00	19.50
Overhead	140.86	34.86	279.57
Total Cost per unit	246.86	197.26	382.07
Under ABC System
	Actual Price	Cost	Profit	Profit % on Cost
Product A	304.00	246.86	57.14	23.15%
Product B	273.60	197.26	76.34	38.70%
Product C	328.00	382.07	-54.07	-14.15%
Most Profitable under ABC System				Product B
Least Profitable under ABC System				Product C
3		Product A	Product B	Product C
Product Costs
ABC Based System		246.86	197.26	382.07
ABC Based Product Pricing
Target price (150%)		370.28	295.88	573.11
Actual Selling Price		304.00	273.60	328.00
Difference in Price		-66.28	-22.28	-245.11