Question

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.

Answer 1

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	Boxes of Yarn sold to retail stores	250500	$3.00
Catalogs	$4,30,400	Catalogs distributed	205000	$2.10
Cost of catalogs sales	$1,23,000	Skeins sold through catalogs	9000	$13.67
Credit and collection	$99,000	Number of retail orders	860800	$0.12

Allocation of Selling Costs to order sizes
Activity	Activity Rate	Small	Medium	Large	Total
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	7,51,500.00
Catalogs	$2.10	89000	$1,86,900.00	62000	$1,30,200.00	54000	$1,13,400.00	4,30,500.00
Cost of catalogs sales	$13.67	585	$7,996.95	2915	$39,848.05	5500	$75,185.00	1,23,030.00
Credit and collection	$0.12	412730	$49,527.60	283470	$34,016.40	164600	$19,752.00	1,03,296.00
Total cost for all orders			$2,51,924.55		$3,84,064.45		$7,72,337.00	14,08,326.00
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 shows "Small orders are preferable to medium sized orders".