Question

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.

Answer 1

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