Question

Stuart Cameras, Inc. manufactures two models of cameras. Model ZM has a zoom lens; Model DS has a fixed lens. Stuart uses an activity-based costing system. The following are the relevant cost data for the previous month:

   

Direct Cost per Unit	Model ZM			Model DS
Direct materials	$	20.4		$	9.0
Direct labor		28.8			11.0

   

Category	Estimated Cost					Cost Driver	Use of Cost Driver
Unit level		$	24,990			Number of units	ZM: 2,450 units; DS: 9,450 units
Batch level			44,640			Number of setups	ZM: 24 setups; DS: 24 setups
Product level			88,750			Number of TV commercials	ZM: 13; DS: 12
Facility level			228,000			Number of machine hours	ZM: 400 hours; DS: 800 hours
Total		$	386,380

Stuart’s facility has the capacity to operate 3,600 machine hours per month.

   
Required

1. Compute the cost per unit for each product.

2. The current market price for products comparable to Model ZM is $121 and for DS is $89. If Stuart sold all of its products at the market prices, what was its profit or loss for the previous month?

3. A market expert believes that Stuart can sell as many cameras as it can produce by pricing Model ZM at $116 and Model DS at $40. Stuart 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

Computation of Allocation Rate as per ABC Costing
					Model ZM		Model DS
Activity	Overhead (a)	Cost Driver Quantity (b)	Cost driver	Allocation Rate(c=a/b	No. of Driver (d)	Cost Allocated (c*d)	No. of Driver ( e)	Cost Allocated (c*e)
Unit Level	$24,990	11900	no. of Units	$2	2450	$5,145	9450	$19,845
Batch Level	$44,640	48	setups	$930	24	$22,320	24	$22,320
Product Level	$88,750	25	TV Commercials	$3,550	13	$46,150	12	$42,600
Facility Level	$2,28,000	1200	mach hrs	$190	400	$76,000	800	$1,52,000
Total	$3,86,380					$1,49,615		$2,36,765
No. of Unit						2,450		9,450
Per Unit						$61.07		$25.05

Computation of Cost per Unit
	Model ZM	Model DS
Direct Material per Unit	20.4	9
Direct Labor per Unit	28.8	11
Ovrehead Costs per Unit	61.07	25.05
Cost Per Unit	110.27	45.05

b. Comptation of Profit/Loss
	Model ZM	Model DS	Total
No. of Units Sold	2450	9450
SP per Unit	$121.00	$89.00
CP Per Unit	$110.27	$45.05
Sales	$2,96,450.00	$8,41,050.00	$11,37,500.00
Cost of Goods Sold	$2,70,161.50	$4,25,722.50	$6,95,884.00
Profit (Loss)	$26,288.50	$4,15,327.50	$4,41,616.00

c. Computation of Target Cost
	Model ZM	Model DS
Target Price per Unit	$116.00	$40.00
Target Profit - 30%	$34.80	$12.00
Target Cost per Unit	$81.20	$28.00

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