Question

Franklin Cameras, Inc. manufactures two models of cameras. Model ZM has a zoom lens; Model DS has a fixed lens. Franklin uses an activity-based costing system. The following are the relevant cost data for the previous month: + per Direct Cost per Unit Direct materials Direct labor Model ZM $20.60 29.20 Model DS $10.60 13.20 Category Unit level Batch level Product level Facility level Estimated Cost $ 24,000 47,500 87,500 270,000 $429,000 Cost Driver Number of units Number of setups Number of TV commercials Number of machine hours Use of Cost Driver ZM: 2,500 units; DS: 9,500 units ZM: 25 setups; DS: 25 setups ZM: 14; DS: 11 ZM: 500 hours; DS: 1,000 hours Total Franklin's facility has the capacity to operate 4,500 machine hours per month. Required a. Compute the cost per unit for each product. b. The current market price for products comparable to Model ZM is $129 and for DS is $81. If Franklin sold all of its products at the market prices, what was its profit or loss for the previous month? C. A market expert believes that Franklin can sell as many cameras as it can produce by pricing Model ZM at $124 and Model DS at $46. Franklin would like to use those estimates as its target prices and have a profit margin of 30 percent of target prices. What is the target cost for each product?

Answer 1

Part a
	Computation of Activity Based usage
		Model ZM	Model ZS	Total
	Unit level	2500	9500	12000	units
	Batch level	25	25	50	setups
	Product level	14	11	25	TV commercial
	Facility level	500	1000	1500	machine hours
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Unit level	$                                         24,000	12,000	$                                2.00	per unit
	Batch level	$                                         47,500	50	$                            950.00	per setups
	Product level	$                                         87,500	25	$                         3,500.00	per TV commercials
	Facility level	$                                      2,70,000	1,500	$                            180.00	per machine hours
	Allocation of Overhead Costs
		Model ZM		Model ZS
		Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Unit level	2500	$                               5,000.00	9500	$                              19,000.00
	Batch level	25	$                             23,750.00	25	$                              23,750.00
	Product level	14	$                             49,000.00	11	$                              38,500.00
	Facility level	500	$                             90,000.00	1000	$                           1,80,000.00
	Total Overhead Cost allocated		$                          1,67,750.00		$                           2,61,250.00
	Production		2500		9500
	Overhead Cost per racquet		$                                    67.10	per unit	$                                     27.50	per unit
	Computation of Product Cost per unit
		Model ZM	Model ZS
	Direct materials	$                                           20.60	$                                    10.60
	Direct labor	$                                           29.20	$                                    13.20
	Overhead Costs	$                                           67.10	$                                    27.50
	Product Cost per unit	$                                         116.90	$                                    51.30
Part b	Computation of Profit per unit	Model ZM	Model ZS
	Sales Per unit	$                                         129.00	$                                    81.00
	Product Cost per unit	$                                         116.90	$                                    51.30
	Profit per unit	$                                           12.10	$                                    29.70
Part c	Computation of Target cost per unit	Model ZM	Model ZS
	Target Selling price	$                                         124.00	$                                    46.00
	Less:Profit margin at 30% of Target Selling price	$                                           37.20	$                                    13.80
	Target cost per unit	$                                           86.80	$                                    32.20