Question

In: Accounting

Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of...

Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of the items are manufactured by Redwood, while others are purchased for resale. For the products it manufactures, the company currently bases its selling prices on a product-costing system that accounts for direct material, direct labor, and the associated overhead costs. In addition to these product costs, Redwood incurs substantial selling costs, and Roger Jackson, controller, has suggested that these selling costs should be included in the product pricing structure.

After studying the costs incurred over the past two years for one of its products, skeins of knitting yarn, Jackson has selected four categories of selling costs and chosen cost drivers for each of these costs. The selling costs actually incurred during the past year and the cost drivers are as follows:

Cost Category Amount Cost Driver
Sales commissions $ 519,000 Boxes of yarn sold to retail stores
Catalogs 456,760 Catalogs distributed
Cost of catalog sales 128,400 Skeins sold through catalog
Credit and collection 89,100 Number of retail orders
Total selling costs $ 1,193,260

The knitting yarn is sold to retail outlets in boxes, each containing 12 skeins of yarn. The sale of partial boxes is not permitted. Commissions are paid on sales to retail outlets but not on catalog sales. The cost of catalog sales includes telephone costs and the wages of personnel who take the catalog orders. Jackson believes that the selling costs vary significantly with the size of the order. Order sizes are divided into three categories as follows:

Order Size Catalog Sales Retail Sales
Small 1–10 skeins 1–10 boxes
Medium 11–20 skeins 11–20 boxes
Large Over 20 skeins Over 20 boxes

An analysis of the previous year’s records produced the following statistics.

Order Size
Small Medium Large Total
Retail sales in boxes (12 skeins per box) 4,000 64,500 191,000 259,500
Catalog sales in skeins 92,000 65,000 57,000 214,000
Number of retail orders 615 3,065 6,220 9,900
Catalogs distributed 282,530 447,830 183,160 913,520

Required:

1. Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size. (Round your intermediate calculations and unit cost per order to 2 decimal places.)

2. An analysis of selling costs shows. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

  • Management may want to consider offering discounts for large orders.unchecked
  • Small orders are preferable to medium sized orders.unchecked
  • Large orders are preferable to medium sized orders.unchecked
  • Marketing should be focused on small sized orders.

Solutions

Expert Solution

Schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size
(in Total)
Particulars Basis Order size Total (in $)
Small Medium Large
Sales commissions Boxes of yarn sold to retail stores $                8,000.00 $             129,000.00 $         382,000.00 $                 519,000.00
(W.N - 1) ($ 2 x 4000) ($ 2 x 64,500) ($ 2 x 191,000)
Catalogs Catalogs distributed $            141,265.00 $             223,915.00 $           91,580.00 $                 456,760.00
(W.N - 2) ($0.50 x 282,530) ($0.50 x 447,830) ($0.50 x 183,160)
Cost of catalog sales Skeins sold through catalog $              55,200.00 $               39,000.00 $           34,200.00 $                 128,400.00
(W.N - 3) ($ 0.60 x 92,000) ($ 0.60 x 65,000) ($ 0.60 x 57,000)
Credit and collection Number of retail orders $                   281.47 $                 1,402.77 $           87,415.76 $                   89,100.00
(W.N - 4) ($ 0.46 x 615) ($ 0.46 x 3,065) ($ 0.46 x 6,220)
Total Selling costs $                    204,746.47 $                      393,317.77 $                595,195.76 $                        1,193,260.00
W.N - 1 - (Sales commissions)
Total sales commission $            519,000.00
Cost driver Boxes of yarn sold to retail stores
Total no.of boxes sold
- Small                           4,000
- Medium                         64,500
- Large                       191,000                     259,500
Sales commission per box sold
($ 519,000 / 259,500) $                       2.00
W.N - 2 - (Catalogue)
Total Cost of catalogues $            456,760.00
Cost driver Catalogues distributed
Total catalogues distributed
- Small                       282,530
- Medium                       447,830
- Large                       183,160                     913,520
Cost per catalogue distributed
($456,760 / 913,520) $                       0.50
W.N - 3 - (Cost of Catalogue sales)
Total Cost of catalogue sales $            128,400.00
Cost driver Skeins sold through catalog
Total Skeins sold through catalog
- Small                         92,000
- Medium                         65,000
- Large                         57,000                     214,000
Cost of catalogue per Skeins sold through catalog
($ 128,400 / 214,000) $                       0.60
W.N - 4 - Credit and collection
Total Credit and collection cost $              89,100.00
Cost driver No.of retail orders
Total retail orders
- Small                              615
- Medium                           3,065
- Large                       191,000                     194,680
Credit and collection cost per order
($ 89,100 / 194,680) $                       0.46

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