Question

Brokia Electronics manufactures three cell phone models, which differ only in the components included: Basic, Photo, and UrLife. Production takes place in two departments, Assembly and Special Packaging. The Basic and Photo models are complete after Assembly. The UrLife model goes from Assembly to Special Packaging and is completed there. Data for July are shown in the following table. Conversion costs are allocated based on the number of units produced. There are no work-in-process inventories.

	Total			Basic (40,000 units)			Photo (30,000 units)			UrLife (10,000 units)
Materials	$	2,330,000		$	489,000		$	1,209,000		$	632,000
Conversion costs:
Assembly	$	2,143,600
Special Packaging		609,000
Total conversion costs	$	2,752,600

Required:

a. What is the cost per unit transferred to finished goods inventory for each of the three phones in July? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. The UrLife model is sold only to the government on a cost-plus basis. The marketing vice president suggests that conversion costs in Assembly could be allocated on the basis of material costs so he can offer a lower price for the Basic model.

1. What cost would be reported for the three models if the marketing vice president's suggestion is adopted? (Do not round intermediate calculations. Round your answers to 2 decimal places)

2. Would this be ethical? Assume the conversion costs are not related to material dollars.

	Ethical
	Not ethical

Answer 1

a.) Cost per unit for the three models are calculated as below:-

	Total	Basic	Photo	UrLife
Units	80000 Units	40000 Units	30000 Units	10000 Units
Materials	$ 2,330,000	$    489,000	$ 1,209,000	$    632,000
Conversion Costs:
Assembly	$ 2,143,600	$ 1,071,800	$    803,850	$    267,950
Special Packing	$    609,000			$    609,000
Total Conversion Costs	$ 2,752,600	$ 1,071,800	$    803,850	$    876,950
Total Costs	$ 5,082,600	$ 1,560,800	$ 2,012,850	$ 1,508,950
Cost Per unit		$        39.02	$        67.10	$      150.90

The Assembly costs have been allocated to the three models based on the number of units and the Special Packing is allocated only to UrLife as only UrLife requires Special Packing.

The formulas showing the calculation of the above table are as follows:-

b.) Part 1) If Vice President's suggestion of allocating the Assembly conversion cost based on the material costs is adopted, the the cost per unit would be reported as follows:-

	Total	Basic	Photo	UrLife
Units	80000 Units	40000 Units	30000 Units	10000 Units
Materials	$ 2,330,000	$    489,000	$ 1,209,000	$    632,000
Conversion Costs:
Assembly	$ 2,143,600	$    449,880	$ 1,112,280	$    581,440
Special Packing	$    609,000			$    609,000
Total Conversion Costs	$ 2,752,600	$    449,880	$ 1,112,280	$ 1,190,440
Total Costs	$ 5,082,600	$    938,880	$ 2,321,280	$ 1,822,440
Cost Per unit		$        23.47	$        77.38	$      182.24

The formulas used are as follows:-

Part 2) Not Ethical

The decision of vice president is not ethical because first of all, the conversion costs are not related to material dollars and secondly, the net effect of this proposal is to increase the per unit cost of UrLife which is sold on a Cost-Plus model to the government and thus charge higher prices to the government while retaining the revenue from other models and also with the same level of costs. This shows the manuplative intent to short-change the government and raid the tax dollars to increase the profit and such practice is totally unethical.

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