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\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

$213\mathrm{.}00$

$254\mathrm{.}25$

$200\mathrm{.}00$

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.

PART B

Refer to the product costs developed in requirement $(4$a$).$

REQUIRED

Prepare a table showing how Computer Accessories$$ traditional, volume$-$based product$-$costing system distorts the product costs of motherboard, power supply, and CPU. $($refer to Exhibit $8\mathrm{.}9$ page, $342$ for guidance$).$ Discuss the distortions.

PART C

Refer to the new target prices for Computer Accessories$$ three products, based on the new activity$-$based costing system in requirement $(4$a$).$

REQUIRED

Write a memo to the company president commenting on the situation Computer Accessories, Inc. has been facing regarding the market for its products and the actions of its competitors. Discuss the strategic options available to management. What do you recommend, and why? $($Note: You must use a proper memo format$)$