Question

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

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 $727,900. 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	$	60.00			$	124.40			$	75.00
Direct labor		30.00				22.00				15.50
Total prime cost	$	90.00			$	146.40			$	90.50

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		2			5			3		$	8,900
Weight of direct materials (pounds)		410			260			360			170,500
Waste and hazardous disposals		35			55			40			387,500
Quality inspections		40			45			45			85,000
Utilities (machine hours)		3,100			8,000			1,550			76,000
Total										$	727,900

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. (Round your intermediate calculations and final answers to 2 decimal places.)

	Product A Product B Product C Product costs: Activity system ABC- based product pricing: Target price Actual selling price 296.00 265.60 320.00 Difference in price $296.00 $265.60 $320.00

Answer 1

Cost Pool	Amount	Activity Level	Activity Rate
Number of setups	$              8,900	10	$            890.00
Weight od direct materials	$ 170,500	1,030	$            165.53
Waste and hazardous disposals	$ 387,500	130	$ 2,980.77
Quality Inspection	$            85,000	130	$            653.85
Utilities	$            76,000	12,650	$                6.01
	$ 727,900

	Product A	Product B	Product C
Overhead Cost
Number of setups	$            1,780.00	$            4,450.00	$            2,670.00
Weight od direct materials	$          67,868.93	$          43,038.83	$          59,592.23
Waste and hazardous disposals	$ 104,326.92	$ 163,942.31	$ 119,230.77
Quality Inspection	$          26,153.85	$          29,423.08	$          29,423.08
Utilities	$          18,624.51	$          48,063.24	$            9,312.25
Total Overhead Cost	$ 218,754.21	$ 288,917.46	$ 220,228.33
Number of Units	1,550	7,750	775
Overhead Cost per unit	$               141.13	$                 37.28	$               284.17
Prime Cost per unit	$                 90.00	$               146.40	$                 90.50
Total Cost per unit	$               231.13	$               183.68	$               374.67
Target Price	$               346.70	$               275.52	$               562.00
Actual Selling Price	$               296.00	$               265.60	$               320.00
Difference in Price	$                -50.70	$                  -9.92	$              -242.00