Question

he Chromosome Manufacturing Company produces two products, X and Y. The company president, Jean Mutation, is concerned about the fierce competition in the market for product X. She notes that competitors are selling X for a price well below Chromosome's price of $12.70. At the same time, she notes that competitors are pricing product Y almost twice as high as Chromosome's price of $12.50. Product X Product Y Number of Units 11,000 3,000 Direct materials cost per unit $3.23 $3.09 Direct labor cost per unit $2.22 $2.10 Direct labor hours 10,000 2,500 Machine hours 2,100 2,800 Inspection hours 80 100 Purchase orders 10 30 Ms. Mutation has learned that overhead costs are assigned to products on the basis of direct labor hours. The overhead costs for this time period consisted of the following items: Ms. Mutation has obtained the following data for a recent time period: Overhead Cost Item Amount Inspection costs $16,200 Purchasing costs $8,000 Machine costs $49,000 Total $73,200

Using Direct labor Hours to allocate overhead costs determine the gross margin per unit for Product X Using ABC for overhead allocation, determine the gross margin per unit for Product Y.

Answer 1

Solution:

Unit price of X = $12.70

Direct material cost per unit of X = $3.23

Direct labor cost per unit of X = $2.22

Number of unit produced for X = 11000

Total Overhead cost = $73,200

Direct labor hours of X = 10000 hours

Total direct labor hours = 10000 + 2500 = 12500 hours

Absorption rate = Overhead cost / direct labor hours = 73,200 / 12500 = $5.856 per hour

Direct labor hour per unit = 10000 / 11000 = 0.909 hours per unit

Allocated overhead cost per unit of X = $5.856 * 0.909 = $5.32 per unit

Gross margin per unit of X = Selling price per unit - direct material per unit = direct labor per unit - allocated overhead per unit

= 12.70 - 3.23 - 2.22 - 5.32 = $1.93 per unit

Allocation of overhead cost using ABC
Overhead cost	Amount	Allocation base	Usage of activity		Allocated overhead
			X	Y	X	Y
Inspection Cost	$16,200.00	Inspection hours	80	100	$7,200.00	$9,000.00
Purchasing Cost	$8,000.00	Purchase Orders	10	30	$2,000.00	$6,000.00
Machine Cost	$49,000.00	Machine Hours	2100	2800	$21,000.00	$28,000.00
Total	$73,200.00				$30,200.00	$43,000.00

Unit price of Y = $12.50

Direct material cost per unit of Y = $3.09

Direct labor cost per unit of Y= $2.10

Nos of unit produced for Y = 3000

Allocated overhead using ABC = $43,000

Overhead cost per unit = $43,000/3000 = $14.33 per unit

Gross margin per unit of Y = $12.50 - $3.09 - $2.10 - $14.33 = -$7.02 per unit