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 $ 751,500 Boxes of yarn sold to retail stores
Catalogs 430,400 Catalogs distributed
Cost of catalog sales 123,000 Skeins sold through catalog
Credit and collection 99,000 Number of retail orders
Total selling costs $ 1,403,900

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) 2,500 60,000 188,000 250,500
Catalog sales in skeins 89,000 62,000 54,000 205,000
Number of retail orders 585 2,915 5,500 9,000
Catalogs distributed 412,730 283,470 164,600 860,800

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.unanswered
  • Small orders are preferable to medium sized orders.unanswered
  • Large orders are preferable to medium sized orders.unanswered
  • Marketing should be focused on small sized orders.unanswered

Nex

Solutions

Expert Solution

1.

Determination of activity rate for each activity
Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate
sales Commissions $7,51,500.00 Boxes of Yarn sold to retail stores 250500 $3.00
Catalogs $4,30,400.00 Catalogs distributed 205000 $2.10
Cost of catalogs sales $1,23,000.00 Skeins sold through catalogs 9000 $13.67
Credit and collection $99,000.00 Number of retail orders 860800 $0.12
Total $14,03,900.00
Allocation of Selling Costs to order sizes
Activity Activity Rate Small Medium Large
Usage Allocated Costs Usage Allocated Costs Usage Allocated Costs
sales Commissions $3.00 2500 $7,500.00 60000 $1,80,000.00 188000 $5,64,000.00
Catalogs $2.10 89000 $1,86,900.00 62000 $1,30,200.00 54000 $1,13,400.00
Cost of catalogs sales $13.67 585 $7,996.95 2915 $39,848.05 5500 $75,185.00
Credit and collection $0.12 412730 $49,527.60 283470 $34,016.40 164600 $19,752.00
Total cost for all orders $2,51,924.55 $3,84,064.45 $7,72,337.00
Nos of skeins sold 89000 62000 54000
Unit cost per order of a given size $2.83 $6.19 $14.30

2.

An analysis of selling costs show "Small orders are preferable to medium sized orders".


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