Question

Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4)

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	$	811,500		Boxes of yarn sold to retail stores
Catalogs		404,720		Catalogs distributed
Cost of catalog sales		206,100		Skeins sold through catalog
Credit and collection		91,200		Number of retail orders
Total selling costs	$	1,513,520

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	72,000	196,000	270,500
Catalog sales in skeins	97,000	70,000	62,000	229,000
Number of retail orders	665	3,315	7,420	11,400
Catalogs distributed	128,850	260,225	116,825	505,900

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.checked

Small orders are preferable to medium sized orders.unanswered

Large orders are preferable to medium sized orders.checked

Marketing should be focused on small sized orders.

Answer 1

Cost Category	Cost	Cost Driver	cost activity	Cost driver rate (cost /cost activity)
Sales commissions	811,500	Boxes of yarn sold to retail stores	270,500	$        3.00
Catalogs	404,720	Catalogs distributed	505,900	$        0.80
Cost of catalog sales	206,100	Skeins sold through catalog	229,000	$        0.90
Credit and collection	91,200	Number of retail orders	11,400	$        8.00
Total selling costs	1,513,520

	Order Size
	Small	Medium	Large
Sales commissions
Retail sales in boxes (12 skeins per box)	2,500	72,000	196,000
Cost driver rate	3.00	3.00	3.00
cost allocated (multiply of both)	7500	216000	588000
Catalogs
Catalogs distributed	128850	260225	116825
Cost driver rate	0.80	0.80	0.80
cost allocated (multiply of both)	103080	208180	93460
Cost of catalog sales
Catalog sales in skeins	97000	70000	62000
Cost driver rate	0.90	0.90	0.90
cost allocated (multiply of both)	87300	63000	55800
Credit and collection
Number of retail orders	665	3315	7420
Cost driver rate	8.00	8.00	8.00
cost allocated (multiply of both)	5320	26520	59360

	Order Size
	Small	Medium	Large	Total
Sales commissions	7500	216000	588000	811500
Catalogs	103080	208180	93460	404720
Cost of catalog sales	87300	63000	55800	206100
Credit and collection	5320	26520	59360	91200
Total selling costs	203200	513700	796620	1513520
Total sales in skeins	127000	934000	2414000
selling cost per skeins (Total selling costs / Total sales in skeins)	$        1.60	$        0.55	$        0.33

	Small	Medium	Large
Retail sales in boxes	2,500	72,000	196,000
skins per box	12	12	12
Retail sales in skins (multiply of both)	30000	864000	2352000
Retail sales in skins	30000	864000	2352000
Catalog sales in skeins	97000	70000	62000
Total sales in skeins	127000	934000	2414000

analysis of selling costs shows	Remarks
Management may want to consider offering discounts for large orders	because selling cost per skeins is lower, and higher volume of sales.
Large orders are preferable to medium sized orders	large order size cost is lower.