Question

Armstrong Company produces a variety of bicycles. One of its plants produces two bicycles: a mountain model and a racing model. At the beginning of the year, the following data were prepared for this plant:

	Mountain	Racing
Quantity	250,000	125,000
Selling Price	$1,200	$1,000
Unit Prime Cost	$ 400	$ 500

In addition, the following information was provided so that overhead costs could be assigned to each product:

Activity Name	Activity Driver	Activity Cost	Racing	Mountain
Machining	Machine hours	$20,000,000	250,000	250,000
Engineering	Engineering hours	$ 8,000,000	75,000	50,000
Packing	Packing orders	$ 3,500,000	50,000	125,000

Armstrong Company uses activity-based costing to calculate product costs.

Calculate the per unit product cost for a mountain bike.

Calculate the per unit product cost for a racing bike.

Assume Armstrong Company adds 40% to the cost of a mountain bike and 35% to the

cost of a racing bike obtain the selling prices. Calculate the selling prices for a mountain bike and a racing bike.

Answer 1

RACING BIKE

Machining = $20,000,000 / (250,000 + 250,000) = $40 MHrs * 250,000

MH = $10,000,000

Engineering = $8,000,000 / (75,000 + 50,000) = $64 EHrs * 75,000

EH =$4,800,000

Packing = $3,500,000 / (50,000 + 125,000) = $20 PO * 50,000

PO =$1,000,000

MOUNTAIN BIKE

Machining = $20,000,000 / (250,000 + 250,000) = $40 MHrs * 250,000

MH = $10,000,000

Engineering = $8,000,000 / (75,000 + 50,000) = $64 EHrs * 50,000

EH =$3,200,000

Packing = $3,500,000 / (50,000 + 125,000) = $20 PO * 125,000

PO =$2,500,000

1) Per unit product cost for a mountain bike = $ 400 + $ 40 + $ 64 + $ 20 = $524

2)Per unit product cost for a racing bike = $ 500 + $ 40 + $ 64 + $ 20 = $624

3) Total cost of Mountain Bike = [($400 *250,000) + ($10,000,000 + $3,200,000 + $2,500,000)]

= 115,700,000

Add- 40% of cost = 46,280,000

Total sale = 115700000 + 46280000 = 161,980,000

Selling price per unit = 161980000 / 250000 = 647.92

Total cost of Racing Bike = [($400 *250,000) + ($10,000,000 + $4,800,000 + $1,000,000)]

= 115,800,000

Add- 35% of cost = 40,530,000

Total sale = 115800000 + 40530000 = 156,330,000

Selling price per unit = 156,330,000 / 125000 = 1250.64