Computer Accessories, Inc. manufactures three products for the computer industry. The details of

its annual sales are as follows:

Motherboard: annual sales, $8,000$ units

Power supply: annual sales, $15,000$ units

CPU: annual sales, $4,000$ units

Currently, the company uses a traditional, volume$-$based product$-$costing system with

manufacturing overhead applied based on direct$-$labor dollars.

The following information are available for each of the product:

Motherboard Power Supply CPU

Raw material per unit $$35\mathrm{.}00$ $$52\mathrm{.}50$ $$17\mathrm{.}50$

Direct labor rate per

hour

$$20$ per hour $$20$ per hour $$20$ per hour

Direct labor hour per

unit

$0\mathrm{.}8$ hour $0\mathrm{.}6$ hour $0\mathrm{.}4$ hour

Additionally, the manufacturing overhead budget is as follows:

Manufacturing overhead budget:

Machine setup $$5,250$

Machinery $1,225,000$

Inspection $525,000$

Material handling $875,000$

Engineering $344,750$

Total Manufacturing overhead cost $$2,975,000$

Computer Accessories$$ pricing method has been to set a target price equal to $150$ percent of full

product cost. However, only the power supply has been selling at their target price. The actual

current prices for all three products are the following:

Motherboard Power Supply CPU

Actual current selling price $213\mathrm{.}00254\mathrm{.}25200\mathrm{.}00$

Computer Accessories has been forced to lower the price of motherboards to get orders. In

contrast, Computer Accessories has raised the price of CPU several times, but there has been no

apparent loss of sales. Computer Accessories, Inc. has been under pressure to reduce the price

even further on motherboard. In contrast, Computer Accessories$$ competitors do not seem to be

interested in the market for CPU. Computer Accessories apparently has this market to itself.

REQUIRED

$1.$ Calculate the total product cost per unit and the target prices for each of Computer

Accessories$$ products using the current pricing policy $($show ALL necessary workings$)$

$2.$ Calculate the actual gross profit for each product. Comment on these profit figures and

the current costing system used to calculate these profit figures.

$3.$ Comment on the reactions of Computer Accessories$$ competitors to the firm$$s pricing

strategy. What dangers does Computer Accessories, Inc. face?

$4.$ Computer Accessories$$ controller, Ms$.$ Vella Rose, recently attended a conference at

which activity$-$based costing systems were discussed. She became convinced that such a

system would help Computer Accessories$$ management to understand its product costs

better. She got top management$$s approval to design an activity$-$based costing system,

and an ABC project team was formed. In stage one of the ABC project, each of the

overhead items listed in the overhead budget was placed into its own activity cost pool.

Then a cost driver was identified for each activity cost pool. Finally, the ABC project

team compiled data showing the percentage of each cost driver that was consumed by

each of Computer Accessories$$ product lines. These data are summarized as follows:

Activity Cost

Pool

Cost Driver Motherboard Power Supply CPU

Machine setup Number of

setups

$20\%30\%50\%$

Machinery Machine hours $25\%50\%25\%$

Inspection Number of

inspections

$15\%45\%40\%$

Material

handling

Raw$-$material

costs

$25\%69\%6\%$

Engineering Number of

change orders

$35\%10\%55\%$

a$.$ Calculate unit product costs and the target prices for the three products using an

activity$-$based costing system. $($Round to the nearest cent.$)$ Show all necessary

workings.