Problem - Pricing decision made with ABC system cost data
Fuller Sporting Goods Corporation makes two types of racquets, tennis and badminton. The company uses the same facility to make both products even though the processes are quite different. The Company has recently converted its cost accounting system to activity-based costing. The following are the cost data that Beth Orpin, the cost accountant, prepared for the third quarter of 2014 (during which Fuller made 70,000 tennis racquets and 30,000 badminton racquets).
| Direct Cost |
Tennis Racquet (TR) |
Badminton Racquet (BR) |
| Direct materials |
$22 per unit |
$18 per unit |
| Direct labor |
32 per unit |
26 per unit |
| Category |
Estimated Cost |
Cost Driver |
Amount of Cost Driver |
| Unit level |
$750,000 |
Number of inspection hours |
TR: 15,000 hours; BR: 10,000 hours |
| Batch level |
250,000 |
Number o setups |
TR: 80 setups; BR: 45 setups |
| Product level |
150,000 |
Number of TV commercials |
TR: 4; BR: 1 |
| Facility level |
650,000 |
Number of machine hours |
TR: 30,000 hours; BR: 35,000 hours |
| Total |
$1,800,000 |
|
|
Inspectors are paid according to the number of actual hours worked, which is determined by the number of racquets inspected. Engineers who set up equipment for both products are paid monthly salaries. TV commercial fees are paid at the beginning of the quarter. Facility-level cost includes depredation of all production equipment.
a) Compute the cost per unit for each product.
b) Id management wants to price badminton racquets 30 percents above cost, what price should the company set?