Question

Bismarck Cameras, Inc. manufactures two models of cameras. Model ZM has a zoom lens; Model DS has a fixed lens. Bismarck uses an activity-based costing system. The following are the relevant cost data for the previous month:   

Direct Cost per Unit	Model ZM			Model DS
Direct materials	$	45		$	20
Direct labor		32			15

   

Category	Estimated Cost					Cost Driver	Use of Cost Driver
Unit level		$	27,000			Number of units	ZM: 2,400 units; DS: 9,600 units
Batch level			50,000			Number of setups	ZM: 25 setups; DS: 25 setups
Product level			90,000			Number of TV commercials	ZM: 15; DS: 10
Facility level			300,000			Number of machine hours	ZM: 500 hours; DS: 1,000 hours
Total		$	467,000

   
Bismarck’s facility has the capacity to operate 4,500 machine hours per month.

Required  

1. Compute the cost per unit for each product.

2. The current market price for products comparable to Model ZM is $200 and for DS is $86. If Bismarck sold all of its products at the market prices, what was its profit or loss for the previous month?

3. A market expert believes that Bismarck can sell as many cameras as it can produce by pricing Model ZM at $196 and Model DS at $84. Bismarck would like to use those estimates as its target prices and have a profit margin of 30 percent of target prices. What is the target cost for each product?
   

Answer 1

Solution 1:

Allocation of overhead and computation of overhead cost per unit
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Model ZM	Model DS
Usage	Allocated Costs	Usage	Allocated Costs
Unit level	$27,000.00	Nos of units	12000	$2.25	2400	$5,400	9600	$21,600
Batch level	$50,000.00	Nos of setups	50	$1,000.00	25	$25,000	25	$25,000
Product level	$90,000.00	Nos of TV commercials	25	$3,600.00	15	$54,000	10	$36,000
facility level	$300,000.00	Nos of machine hours	1500	$200.00	500	$100,000	1000	$200,000
Total	$467,000.00					$184,400		$282,600
Nos of units						2400		9600
Overhead cost per unit						$76.83		$29.44

Computaiton of Cost per unit
Product	Direct materials	+	Direct labor	+	Allocated overhead	=	Total
Model ZM	$45.00	+	$32.00	+	$76.83	=	$153.83
Model DS	$20.00	+	$15.00	+	$29.44	=	$64.44

Solution 2:

Computation of profit & Loss of previous month
Particulars	Model ZM	Model DS	Total
Sales revenue	$480,000.00	$825,600.00	$1,305,600.00
Costs	$369,192.00	$618,624.00	$987,816.00
Profit (Loss)	$110,808.00	$206,976.00	$317,784.00

Solution 3:

Computation of Target Cost
Particulars	Model ZM	Model DS
Price per unit	$196.00	$84.00
Profit margin	$58.80	$25.20
Target cost/unit	$137.20	$58.80