Question

Problem 5-18A Pricing decisions made with ABC system cost data LO 5-1, 5-2, 5-3 Adams 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 Adams made 72,000 tennis racquets and 31,000 badminton racquets). Direct Cost Direct materials Direct labor Tennis Racquet (TR) $19.10 per unit 35.00 per unit Badminton Racquet (BR) $14.40 per unit 24.90 per unit <500 Category Unit level Batch level Product level Facility level Total Estimated cost $ 780,000 312,500 140,000 620,000 $1,852,500 Cost Driver Number of inspection hours Number of setups Number of TV commercials Number of machine hours Amount of Cost Driver TR: 15,900 hours; BR: 10,100 hours TR: 75 setups; BR: 50 setups TR: 4; BR: 1 TR: 30,600 hours; BR: 31,400 hours 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 a. Compute the cost per unit for each product. b. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer 1

Category	Cost	Cost Driver		Cost per Cost driver
Unit Level	$       780,000	26000	Inspection hours	$                   30	per inspection hour
Batch Level	$       312,500	125	Setups	$             2,500	per setup
Product Level	$       140,000	5	TV Commercials	$           28,000	per TV Commercial
Facility Level	$       620,000	62000	Machine hours	$                   10	per machine hour
Total	$    1,852,500

a.

	TR	BR
Direct Material	$    1,375,200	$         446,400
Direct Labor	$    2,520,000	$         771,900
Overhead allocated
Unit Level	$       477,000	$         303,000
Batch Level	$       187,500	$         125,000
Product Level	$       112,000	$           28,000
Facility Level	$       306,000	$         314,000
Total Overhead	$    1,082,500	$         770,000
Total Product Cost	$    4,977,700	$     1,988,300
Units Produced	72000	31000
Product Cost per unit	$            69.13	$             64.14

b. Selling Price for Badminton Racquet = $64.14 x 1.3 = $83.38 per unit