Question

Perez Cameras, Inc. manufactures two models of cameras. Model ZM has a zoom lens; Model DS has a fixed lens. Perez uses an activity-based costing system. The following are the relevant cost data for the previous month:

   

Direct Cost per Unit	Model ZM			Model DS
Direct materials	$	20.0		$	9.0
Direct labor		28.0			11.0

   

Category	Estimated Cost					Cost Driver	Use of Cost Driver
Unit level		$	24,990			Number of units	ZM: 2,400 units; DS: 9,500 units
Batch level			48,000			Number of setups	ZM: 24 setups; DS: 24 setups
Product level			88,750			Number of TV commercials	ZM: 13; DS: 12
Facility level			228,000			Number of machine hours	ZM: 400 hours; DS: 800 hours
Total		$	389,740

Perez’s facility has the capacity to operate 3,600 machine hours per month.

   
Required

1A) Compute the cost per unit for each product.

1B) The current market price for products comparable to Model ZM is $121 and for DS is $85. If Perez sold all of its products at the market prices, what was its profit or loss for the previous month?

1C) A market expert believes that Perez can sell as many cameras as it can produce by pricing Model ZM at $116 and Model DS at $40. Perez would like to use those estimates as its target prices and have a profit margin of 30 percent of target prices. What is the target cost for each product?

Answer 1

1A)				ZM	DS
	Direct materials			20	9
	Direct labor			28	11
	Overhead (Note:1)			63	25
	Cost per unit			111	45
	Note:1-Overhead cost per unit
	Overhead allocation inder ABC=Usage of cost driver*Cost per cost driver
	Cost per cost driver=Total estimated cost/Total usage of cost driver
	Category			Estimated Cost	Total usage of cost driver	Cost per cost driver	Cost allocated to
							ZM		DS
	Unit level			24,990	11900	2.1	(2400*2.1)	5040	(9500*2.1)	19950
					(2400+9500)
	Batch level			48,000	48	1000	(1000*24)	24000	(1000*24)	24000
					(24+24)
	Product level			88,750	25	3550	(3550*13)	46150	(3550*12)	42600
					(13+12)
	Facility level			2,28,000	1200	190	(400*190)	76000	(800*190)	152000
					(400+800)
	Total overhead cost							151190		238550
	Units produced							2400		9500
	Overhead cost per unit							63		25
1B)	Profit/Loss:
				ZM	DS
	Market price			121	85
	Less: Cost per unit			111	45
	Profit/loss			10	40
1C)	Target cost:
				ZM	DS
	Target price			116	40
	Less: profit margin @ 30%			34.8	12
	Target cost			81.2	28