Lendrim, Ltd. is an established firm that manufactures a variety of high-quality sports clothing used by college and high school football teams. Over the last year the company's profits have declined. Lendrim's managers have been using product cost information that was developed almost two years ago. In an effort to determine the causes of weakened earnings performance, the company's controller, Al Lovelace, has asked Melanie Roberts, senior cost analyst, to investigate product costing at one of the company's largest plants, in Williamsburg, Virginia.

The Williamsburg plant manufactures high-grade insulated warm-up jackets that are produced in a two-department process. The Assembly Department completes the basic assembly of materials using Materials Packet #1 (insulated liner, outer jacket shell, hood, pocket lining, and zipper or snap attachments). After completion of the basic assembly, the jackets are transferred to the Finishing Department, where Materials Packet #2 is used to embroider school names, logos, monograms, and players' names on the jackets. When the fi nishing work is completed, the jackets are inspected before being transferred to the Finished Goods Inventory. In each department, all materials are added at the beginning of the manufacturing process. Direct labor and manufacturing overhead are applied continuously in both departments.

Roberts has traveled to the Williamsburg plant to develop accurate unit cost information, which will be used to determine whether the production process should be changed or the pricing structure should be altered. The unit cost that is used at the Williamsburg plant for planning, control, and pricing purposes is $75 per jacket. The jackets normally sell for

$125.25 each.

When Roberts arrives at the plant, she is given a tour by plant manager B. J. Lendrim.

Everything looks in order, and Lendrim claims everything has been running smoothly. His only complaint is that he is being evaluated against product costs that were set two years ago; he is sure that most of the plant's costs have increased since then. Roberts reviews the production costs for May and develops the following information:

• The beginning Work in Process Inventory for the Assembly Department held 560 units that were 25% complete as to conversion costs. There was no beginning inventory in the Finishing Department.

• The costs in beginning Work in Process Inventory were: Materials, $12,500; Conversion,

$4,500.

• During May, the Assembly Department started 7,600 jackets, and completed and transferred to the Finishing Department a total of 7,260 jackets.

• At the end of May the Assembly Department had 900 jackets in process that were 40% complete as to conversion costs, and the Finishing Department had 300 jackets in process that were 50% complete as to conversion costs.

• The following costs were incurred during May:

° Materials Packet #1....... $252,700

° Materials Packet #2....... $ 76,230

° Conversion Costs—Assembly ..$231,720

° Conversion Costs—Finishing ...$106,650

Required

a. Calculate the equivalent units in the Assembly and Finishing departments for the month of May.

b. What was the cost per equivalent unit in the Assembly Department? In the Finishing Department? (Only consider the materials and conversion costs added to the department, not the costs of assembled units transferred in.)

c. What was the total unit product cost for the warm-up jackets?

d. Lendrim has been using the two-year-old $75-per-unit cost and a 67% markup ($75 3

167% 5 $125.25) as a basis for pricing the warm-up jackets. Based on the new costs you calculated for May, what markup is Lendrim actually achieving on the product cost? If Lendrim wants to continue using a 67% markup on the product cost, what price should the company charge for the warm-up jacket?

e. Assume you are Melanie Roberts. Write a memo to B. J. Lendrim either supporting or refuting his claim that product costs have risen over the past two years. Be sure to support your position with facts.