Question
Hi I only need answer to Part B only. PART A Computer Accessories, Inc. manufactures three products for the computer industry. The details of its
Hi I only need answer to Part B only.
PART A
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 | $35.00 | $52.50 | $17.50 |
Direct labor rate per hour | $20 per hour | $20 per hour | $20 per hour |
Direct labor hour per unit | 0.8 hour | 0.6 hour | 0.4 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 | 213.00 | 254.25 | 200.00 |
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.
Show
- 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)
- Calculate the actual gross profit for each product. Comment on these profit figures and the current costing system used to calculate these profit figures.
- Comment on the reactions of Computer Accessories' competitors to the firm's pricing strategy. What dangers does Computer Accessories, Inc. face?
- 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.
PART B
Refer to the product costs developed in requirement (4a).
In a show table how Computer Accessories' traditional, volume-based product-costing system distorts the product costs of motherboard, power supply, and CPU. for. Discuss the distortions.
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