Question

Horten 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 Jane Price, the cost accountant, prepared for the third quarter of 2018 (during which Horten made 70,000 tennis racquets and 30,000 badminton racquets).

Direct Cost Tennis Racquet (TR) Badminton Racquet (BR)
Direct materials $17.10 per unit $14.80 per unit
Direct labor 33.50 per unit 23.10 per unit

Category Estimated Cost Cost Driver Amount of Cost Driver
Unit level $736,000 Number of inspection hours TR: 15,900 hours; BR: 7,100 hours
Batch level 353,800 Number of setups TR: 83 setups; BR: 39 setups
Product level 152,500 Number of TV commercials TR: 4; BR: 1
Facility level 630,000 Number of machine hours TR: 30,600 hours; BR: 39,400 hours
Total $1,872,300

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 depreciation of all production equipment.

Required
a. Compute the cost per unit for each product.
b. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer 1

Horten Sporting Goods Corporation

TR BR

a. Cost per unit $66.98 $62.08

b. Price of Badminton Racquets = $80.70

Step-by-step explanation:

a) Data and Calculations:

Tennis Badminton

Racquets Racquets

Units produced 70,000 30,000

Direct costs:

Direct materials $17.10 per unit $14.80 per unit

Direct labor 33.50 per unit 23.10 per unit

Category Estimated Cost Driver Amount of Cost Driver

Cost TR BR Total

Unit level $736,000 Number of inspection hrs 15,900 7,100 23,000

Batch level 353,800 Number of setups 83 39 122

Product level 152,500 Number of TV commercials 4 1 5

Facility level 630,000 Number of machine hrs 30,600 39,400 70,000

Total $1,872,300

Overhead Rates:

Inspection = $32 ($736,000/23,000) per inspection hour

Equipment setup = $2,900 (353,800/122) per equipment setup

TV commercials = $30,500 ($152,500/5) per commercial

Depreciation = $9 ($630,000/70,000) per machine hour

Overhead Allocation:

TR BR Total

Inspection = $32 $508,800 $227,200 $736,000

($32*15,900) ($32*7,100)

Equipment setup = $2,900 240,700 113,100 353,800

($2,900*83) ($2,900*39)

TV commercials = $30,500 122,000 30,500 152,500

($30,500 *4) ($30,500 *1)

Depreciation = $9 275,400 354,600 630,000

($9 * 30,600) ($9 * 39,400)

Total allocated expenses $1,146,900 $725,400 $1,872,300

Units produced 70,000 30,000

Overhead cost per unit $16.384 $24.18

Cost per unit:

TR BR

Direct materials $17.10 $14.80

Direct labor 33.50 23.10

Overhead cost 16.38 24.18

Total cost per unit $66.98 $62.08

Cost of Badminton = $62.08

30% markup = 18.62

Price = $80.70