CASE - NORMAL COSTING What should the selling price be, based on a 20% markup? Your company produces 3 products: Economy, Standard, Premium. You have decided that to meet the Sales demand, the units to be produced are as follows: Economy Standard Premium Units produced 400 500 100 The direct costs details required for the production are as follows: Economy Standard Direct Materials $4,000 $8,000 Direct Labour $8,000 $10,000 Prime Cost $12,000 $18,000 Premium $2,000 $3,000 $5,000 In addition to the direct costs, you will need to engage a third party's machinery for $1,000,000 to produce the three products. The expected direct labour hours and machine hours required by each product are as follows: Economy Standard Premium Overheads - Machine $1,000,000 Direct Labour Hours 8,000 10,000 2,000 Machine hours 10,000 12,000 3,000 The cost per unit presented were as follows: Alan: The cost per unit for the Economy product is $130, the Standard product is $136 and Premium is $150. Betty: The cost per unit for the Economy product is $130, the Standard product is $132 and Premium is $170. 1) Discuss why are the two cost engineers having different costs and who is correct. 2) How does this impact the pricing, profits and decision making? Production information are such: Economy 400 $4,000 $8,000 $12,000 Standard 500 $8,000 $10,000 $18,000 $1,000,000 Premium 100 $2,000 $3,000 $5,000 Units produced Direct Materials Direct Labour Prime Cost Overheads Direct Labour Hours Applied OH - DLH Total Product Cost Unit Cost 8,000 $40,000 $52,000 $130 10,000 $50,000 $68,000 $136 2,000 $10,000 $15,000 $150 Machine hours Applied OH-MH Total Product Cost Unit Cost 10,000 $40,000 $52,000 $130 12,000 $48,000 $66,000 $132 3,000 $12,000 $17,000 $170 Overheads $100,000 20,000 DLH => OH Rate = $5/DLH 25,000 MH => OH Rate = $4/MH