Question
In: Accounting
Eastern Chemical Company produces three products. The operating results of the current year are: Product Sales...
Eastern Chemical Company produces three products. The operating results of the current year are:
| Product | Sales Quantity | Target Price | Actual Price | Difference | ||||||||
| A | 1,900.00 | $ | 302.00 | $ | 303.00 | $ | 1.00 | |||||
| B | 9,500.00 | 314.60 | 272.60 | (42.00 | ) | |||||||
| C | 950.00 | 219.50 | 327.00 | $ | 107.50 | |||||||
The firm sets the target price of each product at 150% of the product’s total manufacturing cost. It appears that the firm was able to sell Product C at a much higher price than the target price of the product and lost money on Product B. Tom Watson, CEO, wants to promote Product C much more aggressively and phase out Product B. He believes that the information suggests that Product C has the greatest potential among the firm’s three products because the actual selling price of Product C was almost 50% higher than the target price, while the firm was forced to sell Product B at a price below the target price.
Both the budgeted and actual factory overhead for the current year are $867,200. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are:
| Product A | Product B | Product C | |||||||||
| Direct materials | $ | 67.00 | $ | 131.40 | $ | 82.00 | |||||
| Direct labor | 37.00 | 29.00 | 19.00 | ||||||||
| Total prime cost | $ | 104.00 | $ | 160.40 | $ | 101.00 | |||||
The controller noticed that not all products consumed factory overhead similarly. Upon further investigation, she identified the following usage of factory overhead during the year:
| Product A | Product B | Product C | Total Overhead | |||||||||
| Number of setups | 4 | 7 | 5 | $ | 8,200 | |||||||
| Weight of direct materials (pounds) | 417 | 267 | 367 | 209,000 | ||||||||
| Waste and hazardous disposals | 42 | 62 | 47 | 475,000 | ||||||||
| Quality inspections | 47 | 52 | 52 | 92,000 | ||||||||
| Utilities (machine hours) | 3,800 | 8,700 | 1,900 | 83,000 | ||||||||
| Total | $ | 867,200 | ||||||||||
Required:
1. Determine the manufacturing cost per unit for each of the products using the volume-based method.
2. What is the least profitable and the most profitable product under both the current and the ABC systems?
3. What is the new target price for each product based on 150% of the new costs under the ABC system? Compare this price with the actual selling price.
Solutions
Expert Solution
| A | B | C | |||||
| Product Sales Quantity | 1900 | 9500 | 950 | ||||
| Selling Price( Currently Sale at) | 303 | 272.6 | 327 | ||||
| Target Selling Price | 302 | 314.6 | 219.5 | ||||
| Difference | 1 | -42 | 107.5 | ||||
| Manufacturing Overhead | 867200 $ | ||||||
| A | B | C | |||||
| Direct Material | 67 | 131.4 | 82 | ||||
| Direct Labour | 37 | 29 | 19 | ||||
| Total PC | 104 | 160.4 | 101 | ||||
| Allocation of Manufatcuring Overhead as per Volume BASed cost Method: | |||||||
| Allocation Rate = Manufacturing OH / Direct Labur Hours | |||||||
| A | B | C | |||||
| Product Sales Quantity | 1900 | 9500 | 950 | ||||
| Direct Labour | 37 | 29 | 19 | ||||
| Direct Labour Hours | 70300 | 275500 | 18050 | ||||
| Allocation Rate = 867200 / 363850 = 2.38339 | |||||||
| 1 | Manufacturing Cost | ||||||
| A | B | C | |||||
| Product Sales Quantity | 1900 | 9500 | 950 | ||||
| Direct Material | 127300 | 1248300 | 77900 | ||||
| Direct Labour Hours | 70300 | 275500 | 18050 | ||||
| Mfr. OH | 167552 | 656624 | 43020 | ||||
| Total Cost | 365152 | 2180424 | 138970 | ||||
| Per Unit | 192 | 230 | 146 | ||||
| Target Price | 288 | 344 | 219 | ||||
| Selling Price | 303 | 273 | 327 | ||||
| Difference | 15 | -72 | 108 | ||||
| Ranking | II | III | I | ||||
| 2 | Ranking iN Volume Cost Method | |||||
| A | B | C | ||||
| Ranking in Old Sysytme | II | III | I | |||
| Ranking in ABC | II | I | III | |||
| 3 | Under ABC System | |||||
| A | B | C | ||||
| Product Sales Quantity | 1900 | 9500 | 950 | |||
| Direct Material | 127300 | 1248300 | 77900 | |||
| Direct Labour Hours | 70300 | 275500 | 18050 | |||
| Mfr OH | 267632 | 333544 | 266025 | |||
| Total Cost | 465232 | 1857344 | 361975 | |||
| Per Unit | 245 | 196 | 381 | |||
| Target Price | 367 | 293 | 572 | |||
| Selling Price | 303 | 272.6 | 327 | |||
| Difference | -64 | -21 | -245 | |||
 ekkarill92 answered 1 year agoRelated SolutionsEastern Chemical Company produces three products. The operating results of the current year are: Product Sales...Eastern Chemical Company produces three products. The operating
results of the current year are:
Product
Sales Quantity
Target Price
Actual Price
Difference
A
1,550.00
$
295.00
$
296.00
$
1.00
B
7,750.00
307.60
265.60
(42.00
)
C
775.00
212.50
320.00
$
107.50
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