Question

Problem 1: Dodson Company

The Dodson Company manufactures and distributes three types of electronic products, Zymol, Zybat and Zycot. The following details the unit sales, selling prices and manufacturing costs of the three electronic devices:

	Zymol	Zybat	Zycot
Sales Price	$100	$120	$180
Manufacturing Cost	$60	$80	$110
Number of units sold	15,000	13,000	12,000

   

Selling, general and administrative (SG&A) expenses are $1,170,000. SG&A expenses are currently being allocated based upon sales revenue for the three products.

The Dodson Company is considering allocating SG&A expenses under an activity based costing methodology as follows:

• Upon further investigation of the SG&A expenses, (50 percent) are shown to be for marketing and advertising. Each product has its own advertising and marketing budget , administered by one of the three marketing managers. Zycot, the premier product, is advertised heavily. Sixty percent of the marketing and advertising budget goes toward Zycot, twenty percent to Zymol and twenty percent to Zybat.

• The remaining SG&A expenses consist of distribution and administrative costs (25 percent) and selling costs (25 percent). The distribution and administration department is responsible for arranging shipping and for billing the customers. Customers pay transportation charges directly to the common carrier. Upon analysis, each electronic product places equal demands on the distribution and administration department and each consumes about the same resources as the others. Selling costs consist primarily of commissions paid to independent salespeople. The commissions are based upon gross margin on the product (ie: sales revenue less manufacturing costs).

Required:

1. Prepare an income statement for each of the three electronic products with SG&A expenses allocated based upon sales revenue for the three products. Identify the most and least profitable products.

2. Prepare an income statement for each of the three electronic products with SG&A expenses allocated based upon activity based costing for the three products. Identify the most and least profitable product

Answer 1

a) Income Statement	Zymol	Zybat	Zycot
No. of units sold	15000	13000	12000
Selling price per unit	$          100	$          120	$          180
Manufacturing Costs per unit	$            60	$            80	$          110
Contribution per unit	$            40	$            40	$            70
Contribution	$ 600,000	$ 520,000	$ 840,000
SG & A Expenes	$ 438,750	$ 380,250	$ 351,000	$1170000*No. of unit of product / 30000
Profit	$ 161,250	$ 139,750	$ 489,000
Most profitable product	Zycot
Least profitable product	Zybat
b) Income Statement	Zymol	Zybat	Zycot	Allocation Basis
No. of units sold	15000	13000	12000	-
Selling price per unit	$          100	$          120	$          180	-
Manufacturing Costs per unit	$            60	$            80	$          110	-
Contribution per unit	$            40	$            40	$            70	-
Contribution	$ 600,000	$ 520,000	$ 840,000	-
Less: Marketing and Advertising(50%*1170000)	$ 117,000	$ 117,000	$ 351,000	60% for Zycot, 20% each for Zybat and Zymol
Less: Distribution and administration costs(25%*1170000)	$    97,500	$    97,500	$    97,500	Allocated to each product equally
Less: Selling Commission(25%*1170000)	$ 109,688	$    95,062	$    87,750	Allocated on the basis of no. of units
Profit	$ 275,812	$ 210,438	$ 303,750
Most profitable product	Zycot
Least profitable product	Zybat