Jones Company has just asked Smith Company to sell it 100 Sprackets for $80 per unit.

Smith normally sells Sprackets for $84 each. Smith produces and sells several products, and prices each product at 200% of the product’s cost. Smith Company’s cost of producing Sprackets under its traditional costing system is based on the following information:

PIF GEE IN ACCEIANS fresecrsccresacrseterarcnscancgsessosarcsssnascossecasscssavovipsaseoase (4 parts @ $2.50 per part)

BCC E SALMON rartee cease teranncs aes stsastastnnsasbsvessassavsvosessssoteed;asvccshepsvners (2 DLH @ $12 per hour)

GEAIMACEONY’ OVEFNEA setpcccecccecccecostssosnossenssesntcnesnasiconseondhvaes ($4 per DLH)

Smith’s controller says:““There is no way we can accept this order; it would not be profitable. We need to sell our products for at least 200% of our cost in order to cover our selling and administrative expenses, and earn a reasonable profit. Ve would earn only about 190% of our cost on this order.” Smith’s factory accountant says: “Yes, we should accept Jones’ order. If we accept the order, we will make more than 200%.”

Smith’s factory accountants and engineers have been working on installing activitybased costing in its factory. Below are its variable factory overhead rates for the activity pools used in producing Sprackets.

Average Driver Rate per Driver Unit Units per Spracket Direct labor related (at $O-25/DLA) o.rnos..s.ssesssescsesscssosssossaorssersserouscconsansststere 2 DLH Machine setup related (at $0.40/setup) .......secssessecssssessesesseesssneesesnneeneesneenes 4 setups Quality inspections related (at $O.50/inspection) ......ssscsssccssessssesssseecssecesnees 3 inspections Because Smith has identified more factory overhead costs as being variable under activity-based costing, each product has different variable costs per unit and its fixed overhead rate has been reduced from $2.10 per DLH to $0.80 per DLH.

Required: (1) Compute the cost per Spracket that Smith’s controller must be using to justify his comment.
(2) Compute the cost per Spracket that Smith’s factory accountant must be using to justify her comment.
(3) Discuss who is “right” and what accounts for the difference in the costs and selling prices per Spracket. LKY-1