Fritz Company manufactures and sells various products. The president of Fritz comes to you (the chief factory accountant) with a concern. She says: “I am concerned about how well our Plappers are selling. Our Plappers are just as good as the next company’s, but we are losing sales, and I’ve determined this is because our $130 selling price per unit is too high. But based on our cost accounting system, we have to sell our products at a gross profit of at least 40% of our selling price in order to cover our selling and administrative expenses. Based on the following costs from our system, we can’t afford to reduce our selling price, so perhaps we'should drop this product from our product line.

Check this out for me.”

Directimaterials (2"parts at Hol per part) i.csss-nerreaseescereserestseceevtccessernrsnensteceroteeseeeroeere ses $10 Directilabor (4° DEH at’ $14 per Hour) .nurciacesrretesovscsescstsvcessavsreesstonieevoresctteor seo ncentenee 56 Total!factory overhead! ($3! per DIL) :22.-ccscsessesacecrocsuccursensetenssorsisereiccassases eteecnaoactate eats wll?

otalicostipetnPlapperrisss: Aer teask ieccitec eeaessonateeaceeceeseaseeeece eae ia eee ea $78 You have been working with engineers to design and implement activity-based costing in the company’s factory. You have found that some factory overhead costs that you previously assumed were fixed are instead variable costs. Based on your findings, you have developed several activity pools and have found that each product has variable costs per unit different from what you previously assumed. The rate per driver unit and the average driver units per Plapper for each activity pool in regard to Fritz Company’s variable factory overhead are as follows:

Average Driver Units Rate per Driver Unit per Plapper Direct labor related (at $0.50/DLH)............csscssessscssvsscsssssssctssesessssssorsees 4 DLH Material movement related (at $0.20/movement)..... . 5 movements Machine hours related (at $0.60/machine hour)........... ... 2 machine hours Inspection related (at $0.40/inspection) ...........sssecssssessssssesessssessssseecssseees 6 inspections Under activity-based costing, Fritz Company’s fixed factory overhead rate is reduced from $1 per direct labor hour (under the old costing system) to $0.60 per direct labor hour.

Required: (1) Based on Fritz Company's traditional costing approach, prove that it is earning a 40% gross profit rate on its sales of Plappers.

(2) Based on the new activity-based costing approach, determine what selling price Fritz Company could charge for Plappers to obtain its target gross profit. Write the president a short memo explaining your findings and making a recommendation. LKY-1