Question

Walton Sporting Goods Corporation makes two types of racquets, tennis and badminton. The company uses the same facility to make both products even though the processes are quite different. The company has recently converted its cost accounting system to activity-based costing. The following are the cost data that Jane Price, the cost accountant, prepared for the third quarter of 2018 (during which Walton made 68,500 tennis racquets and 29,800 badminton racquets). **** Please provide step by step instructions***

   

Direct Cost	Tennis Racquet (TR)				Badminton Racquet (BR)
Direct materials	$	17.60	per unit		$	13.30	per unit
Direct labor		31.00	per unit			26.70	per unit

   

Category	Estimated Cost					Cost Driver	Amount of Cost Driver
Unit level		$	651,000			Number of inspection hours	TR: 15,300 hours; BR: 5,700 hours
Batch level			332,100			Number of setups	TR: 84 setups; BR: 39 setups
Product level			147,500			Number of TV commercials	TR: 4; BR: 1
Facility level			620,000			Number of machine hours	TR: 30,800 hours; BR: 31,200 hours
Total		$	1,750,600

   
Inspectors are paid according to the number of actual hours worked, which is determined by the number of racquets inspected. Engineers who set up equipment for both products are paid monthly salaries. TV commercial fees are paid at the beginning of the quarter. Facility-level cost includes depreciation of all production equipment.

   
Required

A. Compute the cost per unit for each product.

B. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Requirement A

	Type of Product Cost per Unit Tennis Racquet Badminton Racquet
	Requirement B
	What is the price of badminton racquets?
	Price of badminton racquets

Answer 1

• All working forms part of the answer.
• Amounts are in $
• First step is to calculate the Activity Rate at which the allocation will be made.

			Amount of Cost Driver
Category	Estimated Cost (A)-$	Cost Driver	Tennis Racket (B)	Badminton Racket (C)	Total No of cost drivers (D=B+C)	Activity rate (A/D)-$
Unit level	$651000	Number of inspection hours	15300	5700	21000	$31
Batch level	$332100	Number of setups	84	39	123	$2700
Product level	$147500	Number of TV commercials	4	1	5	$29500
Facility level	$620000	Number of machine hours	30800	31200	62000	$10
Total	$1750600

• Second is to allocate the estimated overhead cost to units by using above activity rates.

			Tennis Racket		Badminton Racket
Category	Estimated Cost (A)	Activity rate (B)	No. of cost drivers (C)	Cost allocated (B x C)	No. of cost drivers (D)	Cost allocated (B x D)
Unit level	$651000	$31	15300	$474300	5700	$176700
Batch level	$332100	$2700	84	$226800	39	$105300
Product level	$147500	$29500	4	$118000	1	$29500
Facility level	$620000	$10	30800	$308000	31200	$312000
Total	$1750600			$1127100		$623500
Units				68500		29800
Overhead cost per unit				$16.45		$20.92

• Requirement 1: Product Unit cost

	Tennis Racquets	Badminton Racquets
Direct Material per unit	$17.6	$13.3
Direct labor per unit	$31	$26.7
Overhead cost per unit (Allocated using ABC)	$16.45	$20.92
Total cost per unit	$65.05	$60.92

• Requirement 2: Badminton Price 30% above cost

	Badminton Racquets
Total cost per unit [calculated above]	$60.92
30% Margin [60.92 x 30%]	$18.276
Price to set per unit [60.92+18.276]	$79.2