Shelby Boutique Dress produces two product lines: T-shirts and Sweatshirts. Recent Product Profitability Report prepared by the accountant follows:

T-SHIRTS SWEATSHIRTS

Production and sales volume units 60,000 35,000

Selling price $17.00 $30.00

Direct material $2.50 $6.20

Direct labor $4.50 $7.22

Factory overhead $2.55 $4.08

Cost per Unit (cost to make a unit) $9.55 $17.50

Gross profit (price minus unit cost) $7.45 $12.50

Selling and administrative costs $4.00 $7.00

Profit per unit $3.45 $5.50

Tom, the manager in charge of Sweatshirt operation, has raised concerns about the credibility of the accountants Product Profitability Report. Specifically, Tom believes that:

(1) Each Sweatshirt costs less to make than what has been reported $17.50; and (2) Each Sweatshirt has more profit per unit than the $5.50 shown in the report. As a result, the price set for Sweatshirt is less competitive affecting sales units. Furthermore, this issue has affected negatively the moral of the employees working in Sweatshirts operations. Shelby Boutique Dress has hired Sherry, a Clayton State graduate, to look at the matter. Sherry has stated that the problem could be due to the allocation of factory overhead cost and/or the allocation of selling and administrative costs, because both of them contain indirect costs that are not traceable, thus requiring arbitrary allocations. Upon preliminary study, Sherry has decided to revise the allocation of factory overhead costs using Activity Based Costing based on the following two activities Supervision and Inspection activities. The following data has been compiled for this purpose:

Activity Activity cost Activity-cost driver

Supervision $130,500 # of direct labor hours

Inspection $165,300 # of Inspections

Total factory overhead $295,800

Activities demanded by Product Line

T-SHIRTS SWEATSHIRTS

0.75 DLH per unit 1.2 DLH per unit

60,000 inspections 22,650 inspections

Requirements:

a. Using ABC for the allocation of factory overhead costs, what would be the cost of production per unit and the amount of profit per unit of T-shirts? b. Using ABC for the allocation of factory overhead costs, what would be cost of production and the amount of profit per unit of Sweatshirts?