Question

Horten 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 Horten made 70,000 tennis racquets and 30,000 badminton racquets). Direct Cost Tennis Racquet (TR) Badminton Racquet (BR) Direct materials $ 28 per unit $ 20 per unit Direct labor 34 per unit 28 per unit Category Estimated Cost Cost Driver Amount of Cost Driver Unit level $ 750,000 Number of inspection hours TR: 15,000 hours; BR: 10,000 hours Batch level 250,000 Number of setups TR: 80 setups; BR: 45 setups Product level 150,000 Number of TV commercials TR: 4; BR: 1 Facility level 650,000 Number of machine hours TR: 30,000 hours; BR: 35,000 hours Total $ 1,800,000 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 Compute the cost per unit for each product. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer 1

Direct Costs :

	Tennis Racquet	Badminton Racquet
	$	$
Direct Material	28	20
Direct Labor	34	28
Direct cost per unit	62	48

Overhead Cost :

Category	Estimated Cost	Cost Driver	Tennis Racquet	Badminton Racquet
	$		$	$
Unit Level	750,000	Number of inspection hours	450,000	300,000
Batch Level	250,000	Number of setups	160,000	90,000
Product Level	150,000	Number of TV commercials	120,000	30,000
Facility Level	650,000	Number of machine hours	300,000	350,000
Total overhead cost	1,800,000		1,030,000	770,000
Units produced			70,000	30,000
Overhead cost per unit			$ 14.71	$ 25.67

Computation of price per unit :

	Tennis Racquet	Badminton Racquet
	$	$
Direct cost per unit	62	48
Overhead cost per unit	14.71	25.67
Total cost per unit	76.71	73.67

Price of badminton racquets = $ 73.67 x 130 % = $ 95.77.