Answers
A. Cost per unit for each product:
Working notes:
Overhead cost per unit
| Activity | Cost Driver (Activity) | Overhead Costs | Estimated Units | Rate |
| product inspection | number of units | $120000 | 10000 | $12 per piece |
| machine setups | number of setups | $75000 | 50 | $1500 per setup |
| product advertising | number of TV commercials | $210000 | 14 | $15000 per TV commercial |
| facility depreciation | number of machine hours | $405000 | 10000 | $40.5 per machine hour |
| Total Overhead | $810000 |
Actual number of cost drivers for each of two products:
| Elegance(E) | Comfort(C) | |
| product inspection | 2500 units | 7500 units |
| Machine Setups | 23 setups | 27 setups |
| product advertising | 5 | 9 |
| facility depreciation | 5000 hrs | 5000 hrs |
multiplying the actual activity events for each product times the predetermined rates computed earlier resulted in the overhead allocated to the products:
| Elegance(E) | Comfort(C) | |
| product inspection | $30000 (2500 units*$12) | $90000 (7500 units*12) |
| Machine Setups | $34500 ($1500*23 setups) | $40500 ($1500*27 setups) |
| product advertising | $75000 ($15000*5) | $135000 ($1500*9) |
| facility depreciation | $202500 ($40.5*5000 hrs) | $202500 ($40.5*5000 hrs) |
| Total Overhead | $ 342000 | $ 468000 | |
| overhead cost per unit | 136.8 | 62.4 |
A. Calculation of cost per unit for each product :
| Particulars | Elegance(E) | Comfort(C) |
| Direct labor | $150000 (2500*60) | $247500 (33*7500) |
| Direct labor | $131250 (35*1.5*2500) | $270000 ($36*1*7500) |
| Total overhead | $342000 | $468000 |
| Total cost | $623250 | $985500 |
| Number of units | 2500 | 7500 |
| Cost per unit | $249.3 | $131.4 |
B. If management wants to make 30 percent of cost as a profit margin for Elegance,
Then price is cost (1+ margin) = 249.3*1.3 = $324.09.
C. If Market price for Elegance is set at $300 by competition and if profit margin is set at 30% of cost then the profit will be X * 1.30 = 300
there fore the cost of the elegance shall be = 300/1.3 = 230.77
then the company must cut cost of 249.3-230.77 = $18.53
cut cost through reducing production costs, modernize your marketing efforts, use efficient time strategies, etc.,
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