Question

The Chromosome Manufacturing Company produces two products, X and Y. The company president, Jean Mutation, is concerned about the fierce competition in the market for product X. She notes that competitors are selling X for a price well below Chromosome's price of $13.50. At the same time, she notes that competitors are pricing product Y almost twice as high as Chromosome's price of $12.50.

Ms. Mutation has obtained the following data for a recent time period:

                                                                                    Product X              Product Y

            Number of units 11,000 3,000

            Direct materials cost per unit $3.23 $3.09

            Direct labor cost per unit $2.22 $2.10

            Direct labor hours 10,000 3,500

            Machine hours 2,100 1,800

            Inspection hours 80                        100

            Purchase orders 10 30

Ms. Mutation has learned that overhead costs are assigned to products on the basis of direct labor hours. The overhead costs for this time period consisted of the following items:

            Overhead Cost Item                                         Amount

            Inspection costs                                              $16,200

            Purchasing costs                                                8,000

            Machine costs                                                   49,000

                Total $73,200

Using Direct labor Hours to allocate overhead costs determine the gross margin per unit for Product X. Choose the best answer from the list below.

a. $1.93 b. $3.12 c. $7.38 d. $2.43 e. $1.73

Using activity-based costing for overhead allocation, determine the gross margin per unit for Product Y. Choose best answer from list below.

a. $10.07

b. ($2.27)

c. ($5.23)

d. ($7.02)

e. $7.02

Answer 1

1.b.$3.12.

working:

overhead cost allocated to x based on labour hours = total overhead cost * (labour hours of x / labours hours of x and y)

=>$73,200 *(10,000 / (10000+3500))

=>$73,200 * (10,000 / 13500)

=>$54,222.22.

overhead cost per unit =$54,222.22 / 11,000 units of x

=>$4.93.

the following is calculation of gross margin:

sale price	13.50
less: direct material	(3.23)
direct labour	(2.22)
overhead	(4.93)
gross margin	3.12

2nd question:

C.($5.23)

first let us know the ovehead cost allocated to product Y using the ABC:

inspection allocated to y ($16,200 * (100/ (80+100))	$9,000
purchasing cost allocated to y ($8,000 * (30 / (10+30))	$6,000
machine cost allocated to y ($49,000*(2,100 / (2100+1800))	$22,615.38
total overhead allocated to y	$37,615.38
overhead per unit ($37,615.38 / 3,000 units)	$12.54

the following is the calculation of gross margin:

price	$12.50
less:direct materail	(3.09)
direct labour	(2.10)
overhead cost per unit	(12.54)
gross margin	(5.23)