Question

Stuart 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 Stuart made 69,500 tennis racquets and 31,000 badminton racquets).

Direct Cost	Tennis Racquet (TR)				Badminton Racquet (BR)
Direct materials	$	17.10	per unit		$	14.80	per unit
Direct labor		33.50	per unit			23.10	per unit

Category	Estimated Cost					Cost Driver	Amount of Cost Driver
Unit level		$	736,000			Number of inspection hours	TR: 15,900 hours; BR: 7,100 hours
Batch level			353,800			Number of setups	TR: 83 setups; BR: 39 setups
Product level			152,500			Number of TV commercials	TR: 4; BR: 1
Facility level			630,000			Number of machine hours	TR: 30,600 hours; BR: 39,400 hours
Total		$	1,872,300

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

ANSWER

Calculation of Overhead allocated to both products based on activity based costing
Cost Driver		Inspection Hours	Set Ups	TV Commercials	Machine Hours	Total
Tennis Racquet (TR)	A	15900	83	4	30600
Badminton Racquet (BR)	B	7100	39	1	39400
Total Cost Drivers	C	23000	122	5	70000
Cost Pool	D	736,000	353,800	152,500	630,000
Rate per Driver	E = D/C	32	2,900	30,500	9
Cost allocted to Tennis Racquet (TR)	F = ExA	508,800	240,700	122,000	275,400	1,146,900
Cost allocted to Badminton Racquet (BR)	G = ExB	227,200	113,100	30,500	354,600	725,400
Calculation of Estimated overhead cost per unit
Particulars		Tennis Racquet (TR)	Badminton Racquet (BR)
Units Produced	H	69,500	31,000
Total Allocated Overhead	I	1,146,900	725,400
		(Refer F above)	(Refer G above)
Overhead Cost per Unit	J = I/H	16.50	23.40

1. Calculation of Total Cost per Unit of Tennis Racquet (TR) & Badminton Racquet (BR)

Calculation of total cost per unit ($)
Particulars		Tennis Racquet (TR)	Badminton Racquet (BR)
Direct Material		17.10	14.80
Direct labor		33.50	23.10
Overhead (Allocated per unit) refer J above		16.50	23.40
Total Cost per unit		67.10	61.30

2. Calculation of Price of Badminton Racquet (BR)

Total cost of Badminton Racquet = $ 61.30

Add: - Profit @ 30% (61.30 x 0.30) = $ 18.39

Price where profit is 30% of cost   = $ 79.69