Question

Rundle 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 Rundle made 69,000 tennis racquets and 29,800 badminton racquets).

   

Direct Cost	Tennis Racquet (TR)				Badminton Racquet (BR)
Direct materials	$	18.10	per unit		$	14.80	per unit
Direct labor		32.50	per unit			25.30	per unit

   

Category	Estimated Cost					Cost Driver	Amount of Cost Driver
Unit level		$	640,000			Number of inspection hours	TR: 14,600 hours; BR: 5,400 hours
Batch level			334,800			Number of setups	TR: 79 setups; BR: 45 setups
Product level			150,000			Number of TV commercials	TR: 4; BR: 1
Facility level			540,000			Number of machine hours	TR: 30,400 hours; BR: 29,600 hours
Total		$	1,664,800

   
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

a. Compute the cost per unit for each product.

b. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Required A.

Compute the cost per unit for each product. (Round intermediate calculations and final answers to 2 decimal places.)

	Type of Product Cost per Unit Tennis Racquet Badminton Racquet

Required B.

If management wants to price badminton racquets 30 percent above cost, what price should the company set? (Round intermediate calculations and final answer to 2 decimal places.)

	Price of badminton racquets

Answer 1

• All working forms part of the answer.
• Amounts are in $
• First step is to calculate the Activity Rate at which the allocation will be made.

			Amount of Cost Driver
Category	Estimated Cost (A)-$	Cost Driver	Tennis Racket (B)	Badminton Racket (C)	Total No of cost drivers (D=B+C)	Activity rate (A/D)-$
Unit level	640000	Number of inspection hours	14600	5400	20000	$32
Batch level	334800	Number of setups	79	45	124	$2700
Product level	150000	Number of TV commercials	4	1	5	$30000
Facility level	540000	Number of machine hours	30400	29600	60000	$9
Total	$1664800

• Second is to allocate the estimated overhead cost to units by using above activity rates.

			Tennis Racket		Badminton Racket
Category	Estimated Cost (A)	Activity rate (B)	No. of cost drivers (C)	Cost allocated (B x C)	No. of cost drivers (D)	Cost allocated (B x D)
Unit level	$640000	$32	14600	467200	5400	172800
Batch level	$334800	$2700	79	213300	45	121500
Product level	$150000	$30000	4	120000	1	30000
Facility level	$540000	$9	30400	273600	29600	266400
Total	$1664800			$1074100		$590700
Units				69000		29800
Overhead cost per unit				$15.57		$19.82

• Requirement 1: Product Unit cost

	Tennis Racquets	Badminton Racquets
Direct Material per unit	18.1	14.8
Direct labor per unit	32.5	25.3
Overhead cost per unit (Allocated using ABC)	15.57	19.82
Total cost per unit	$66.17	$59.92

• Requirement 2: Badminton Price 30% above cost

	Badminton Racquets
Total cost per unit [calculated above]	$59.92
30% Margin [59.92 x 30%]	$17.976
Price to set per unit [59.92+17.976]	$77.9