Question

There are 3 questions. You must show your work and how you got the answer. PLEASE DO NOT ANSWER IF YOU ARE NOT SURE

You have been asked to look at production options for the Android01, since production methods and allocation of costs have implications for cost per unit. Two alternative methods of production are being considered. Begin by gathering data (using financial information in decision making), then determine the suitability of the project.

The production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and will be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.

The variable cost of the production facilities and service divisions is $25 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.

	Square Feet	Labor
Processor01 (500 units)	70,000	120
Android01 (300 units)	30,000	80

The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Question 1: In Method B, what would be the cost per unit of producing Android01 using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis?

Before starting on your calculations, review materials on production cost allocation.

An alternate method of assigning costs is activity-based costing.The major activities for the production of both Processor01 and Android01 are fabricator setup and component assembly. There are 500 units of Processor01 and 300 units of Android01 produced every year. There will be a total of 25,000 setups per year for at a total cost of $10 million. Each unit of Android01 will require 40 setups. There will be a total of 125,000 assemblies per year at a total cost of $15 million. Each unit of Android01 will require 180 assemblies. The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Question 2: What would be the cost per unit of producing Android01 using activity-based costing?

Note that in addition to the setup costs and assemblies costs there are two more costs to add: (1) fixed costs of $5 million, which are still distributed at a rate of 30 percent to Android01 and 70 percent to Processor01, and (2) the cost of Android01 components at $25,000 per unit.

Discuss the differences in the cost per unit of Android01 using space as an allocation basis, using labor as an allocation basis, and using activity-based costing. Which method do you think is the most accurate way to assign costs?

Next, suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost per unit is $48,000.

Question 3: What is the price of the Android01 at 30 percent markup over full cost?

Submit your Markup Pricing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Answer 1