Knight Manufacturing produces three different products: A, B, and C. Knight applies overhead to the products on the basis of direct labor dollars. The company has collected the following information about its overhead and labor costs:

The costs of direct materials and direct labor are charged to each product under a job-order costing system. The average cost per unit based on the first of several production runs is as follows:

The company manufactures each product in different batch sizes. Product A is manufactured in lot sizes of 10,000 units per run, product B in lots of 5,000 units per run, and product \(\mathrm{C}\) in lots of 1,000 units per run. The average shipment size is 2,000 units of product A, 500 units of product B, and 100 units of product C. Over the past year, the company has sold 22,000 units of product A, 15,000 units of product B, and 32,000 units of product C.
In recent months, management at Knight has been puzzled by the company's sales and profit figures. The sales of product A have declined significantly since a competitor of that product reduced its selling price below Knight's current cost of manufacturing that product. In addition, Knight has increased its selling price of product C three times over the past year without losing any sales. Even though more product \(\mathrm{C}\) is being sold, and it has the largest gross margin of the three products, overall profits have been falling.
\section*{Required}
A. What problems do you see with the current unit costing methods Knight is using?
B. What reasons can you suggest for the market reactions to the pricing of products A and \(C\) ?
C. What changes would you suggest to management about its current costing policies?

Transcribed Image Text:

Manufacturing overhead: Machine setup Depreciation Receiving and handling Factory operations Packing and shipping Total Total direct labor $ 53.000 400.000 200.000 650,000 400,000 $1,703,000 $ 225,000 Predetermined overhead rate 757% of direct labor dollars ($1.703,000 + $225,000) Knight can produce: Product A-2 units per hour Product B-3 units per hour Product C-4 units per hour