cost management

A strategic Emphasis seventh edition book

chapter 5 question 41 parts 1,2,3

Volume-based costing versus ABC Eastern Chemica Company produces three products. The operating results of the current year are:

Product Sales Quantity Target Price Actual Price Difference

A 1,000 $285.50 $286.00 $1.00

B 5,000 297.60 255.60 (42.00)

C 500 202.50 310.00 $107.50

The firm sets the target price of each product at 150% of the product's total manufacturing cost. Recognizing that the firm was able to sell Product C at a much higher price then the target price of the product and lost money on Product B, Tom Watson, CEO, wants to promote Product C much more aggressively and phase out Product B. He believes that the information suggests that Product C has the greatest potential among the firm's three products since the actual selling price of Product C was almost 50% higher then the target price while the firm was forced to sell Product B at a price below the target price.

Both the budgeted and actual factory overheads for the current year are $510,000. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are:

Product A Product B Product C

Direct materials $50.00 $114.40 $65.00

Direct labor 20.00 12.00 10.00

Total Prime cost $70.00 $126.40 $75.00

The controller noticed not all products consumed factory overhead similarly. Upon further investigations, she identified the following usage of factory overhead during the year:

Product A Product B Product C Total Overhead

Number of setups 2 5 3 $9,000

Weight of direct materials(lbs) 400 250 350 110,000

Waste & hazardous disposals 25 45 30 250,000

Quality inspections 30 35 35 75,000

Utilities (machine hours) 2,000 7,000 1,000 66,000

Total $510,000

Required

1. Determine the manufacturing cost per unit for each of the products using the volume-based method.

2. What is the least profitable and the most profitable product under both the current and the ABC costing systems?

3. What is the new target price for each product based on 150% of the new costs under the ABC system? Compare this price with the actual selling price

4. Comment on the result from a competitive and strategic perspective. As a manager of Eastern Chemical, describe what actions you would take based on the information provided by the activity-based unit costs.