Question

 

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

Ans 1
The total cost consist of
Fixed Cost+Variable cost+Component cost
Space allocation basis is 70:30 for Processor01 and Android01 respectiveley
Cost allocated to Android 01 on the basis of space allocation
Fixed cost= $5000000*30%	$1,500,000
Variable cost=$25000000*30%	7500000
Total cost except component cost for 300 units is	$9,000,000
Cost per unit 9000000/300	$30,000
Total Cost per unit= $30000+$25000(component cost)	$55,000	per unit	ans
Labor basis is 120:80 (or we can say 60:40) for Processor01 and Android01 respectiveley
Fixed cost= $5000000*40%	$2,000,000
Variable cost=$25000000*40%	$10,000,000
Total cost except component cost for 300 units is	$12,000,000
Cost per unit 12000000/300	$40,000
Total Cost per unit= $40000+$25000(component cost)	$65,000	per unit	ans
Ans 2
On the basis on activity
Fixed cost= $5000000*30%	$1,500,000
Variable cost
Setup cost (10000000/25000*12000)	4800000
No of setup required for Android 01=300*40=12000
Assembly cost (15000000/125000*54000)	6480000
No. of assemblies required (300*180=54000)
Total cost except component cost for 300 units is	$12,780,000
Cost per unit 12780000/300	$42,600
Total Cost per unit= $42600+$25000(component cost)	$67,600	per unit	ans
Cost per unit using basis
Factory space	$55,000
Labor	$65,000
Activity Based	$67,600
The most accurate method is activity based allocation as it allocates cost
on the basis of actual usage.
ans 3
Price per unit
Fixed cost (4500000/300)	15000
Variable cost	48000
Component cost	25000
Total cost A	88000
30% markup on $88000 B	26400
Price per unit A+B	114400
If any doubt please comment