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 70,000 tennis racquets and 30,600 badminton racquets).

  

Direct Cost	Tennis Racquet (TR)				Badminton Racquet (BR)
Direct materials	$	19.10	per unit		$	13.90	per unit
Direct labor		34.00	per unit			24.50	per unit

ategory Estimated Cost Cost Driver Amount of Cost Driver Unit level $ 667,000 Number of inspection hours TR: 16,000 hours; BR: 7,000 hours Batch level 365,400 Number of setups TR: 78 setups; BR: 48 setups Product level 142,500 Number of TV commercials TR: 3; BR: 2 Facility level 700,000 Number of machine hours TR: 30,600 hours; BR: 39,400 hours Total $ 1,874,900 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. 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?

Answer 1

Solution:

Part A – Cost per unit

	Tennis Racquet	Badminton Racquet
Direct materials	19.1	13.9
Direct labor	34	24.5
Allocated Overhead Per Unit (Refer Note 1)	15.45	25.92
Cost per Unit	68.55	64.32

Note 1 --- Allocation of Overhead to each product

						Tennis Racquet		Badminton Racquet
Cost Pool Category	Total Estimated Overhead Cost (A)	Total Activity of Cost Driver (B)		Activity Rate per Activity (C = A/B)		Expected Activity (H)	Overhead Assigned (C*H)	Activity Driver USAGE (S)	Overhead Assigned (C*S)
Unit Level	$667,000	23000	Number of inspection hours	$29	per handling	16000	$464,000	7000	$203,000
Batch Level	$365,400	126	Number of setups	$2,900	per part	78	$226,200	48	$139,200
Product Level	$142,500	5	Number of TV commercials	$28,500	per design	3	$85,500	2	$57,000
Facility Level	$700,000	70000	Number of machine hours	$10	per setup	30600	$306,000	39400	$394,000
Total Assigned Overhead Costs (A)	$1,874,900						$1,081,700		$793,200
Units Produced (B)							70,000 Racquet		30,600 Racquet
Overhead Cost per Unit (A / B)							$15.45		$25.92

Part B) If management wants to price badminton racquets 30 percent above cost, what price should the company set?

	Badminton Racquet
Cost per Unit	$64.32
Plus: 30% Mark up	$19.30
Unit Selling Price	$83.62

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