Question

Lopez Company incurred an activity cost of $456,000 for inspecting 120,000 units of production. Management determined that the inspecting objectives could be met without inspecting every unit. Therefore, rather than inspecting 120,000 units of production, the inspection activity was limited to 30% of the production. What is the difference in the activity cost per unit on the 120,000 units after the improvement?

Answer 1

$2.66

Step-by-step explanation:

Data provided in the question:

Incurred activity cost = $456,000

Number of units inspected = 120,000

Limiting percentage of inspection = 30% of the production

Now,

Inspection cost per unit before improvement

= (Incurred activity cost) ÷ ( Number of units inspected )

= $456,000 ÷ 120,000

= $3.8 per unit

And, after the improvement

Units to be inspected = 30% of 120,000

= 0.30 × 120,000

= 36,000 units

Therefore,

Total inspection cost = 36,000 × $3.8

= $136,800

Thus,

Cost per unit after improvement

= $136,800 ÷ 120,000

= $1.14 per unit

Thereofre,

The difference in activity cost = $3.8 - $1.14

= $2.66