Volume-Based Costing versus ABC Eastern Chemical Company produces three products. Theoperating results of the current year are:Product Sales Quantity Target Price Actual Price DifferenceA 1,000 $285.00 $286.00 $ 1.00B 5,000 297.60 255.60 (42.00)C 500 202.50 310.00 $107.50The firm sets the target price of each product at 150% of the product’s total manufacturing cost. Itappears that the firm was able to sell Product C at a much higher price than the target price of theproduct and lost money on Product B. Tom Watson, CEO, wants to promote Product C much moreaggressively and phase out Product B. He believes that the information suggests that Product C hasthe greatest potential among the firm’s three products because the actual selling price of Product Cwas almost 50% higher than the target price, while the firm was forced to sell Product B at a pricebelow the target price.Both the budgeted and actual factory overhead for the current year are $510,000. The actual unitssold for each product also are the same as the budgeted units. The firm uses direct labor dollars toassign manufacturing overhead costs. The direct materials and direct labor costs per unit for eachproduct are:Product A Product B Product CDirect materials $50.00 $114.40 $65.00Direct labor 20.00 12.00 10.00Total prime cost $70.00 $126.40 $75.00The controller noticed that not all products consumed factory overhead similarly. Upon further investigation, she identified the following usage of factory overhead during the year:Product A Product B Product C Total OverheadNumber of setups 2 5 3 $ 9,000Weight of direct materials (pounds) 400 250 350 110,000Waste and hazardous disposals 25 45 30 250,000Quality inspections 30 35 35 75,000Utilities (machine hours) 2,000 7,000 1,000 66,000Total $510,000Required1. Determine the manufacturing cost per unit for each of the products using the volume-based method.2. What is the least profitable and the most profitable product under both the current and the ABC systems?3. What is the new target price for each product based on 150% of the new costs under the ABC system?Compare this price with the actual selling price.4. Comment on the result from a competitive and strategic perspective. As a manager of Eastern Chemical,describe what actions you would take based on the information provided by the activity-based unit costs.
Volume-Based Costing versus ABC Eastern Chemical Company produces three products. The
operating results of the current year are:
Product Sales Quantity Target Price Actual Price Difference
A 1,000 $285.00 $286.00 $ 1.00
B 5,000 297.60 255.60 (42.00)
C 500 202.50 310.00 $107.50
The firm sets the target price of each product at 150% of the product’s total
appears that the firm was able to sell Product C at a much higher price than the target price of the
product and lost money on Product B. Tom Watson, CEO, wants to promote Product C much more
aggressively and phase out Product B. He believes that the information suggests that Product C has
the greatest potential among the firm’s three products because the actual selling price of Product C
was almost 50% higher than the target price, while the firm was forced to sell Product B at a price
below the target price.
Both the budgeted and actual factory overhead for the current year are $510,000. The actual units
sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to
assign manufacturing overhead costs. The direct materials and direct labor costs per unit for each
product are:
Product A Product B Product C
Direct materials $50.00 $114.40 $65.00
Direct labor 20.00 12.00 10.00
Total prime cost $70.00 $126.40 $75.00
The controller noticed that not all products consumed factory overhead similarly. Upon further investigation, she identified the following usage of factory overhead during the year:
Product A Product B Product C Total Overhead
Number of setups 2 5 3 $ 9,000
Weight of direct materials (pounds) 400 250 350 110,000
Waste and hazardous disposals 25 45 30 250,000
Quality inspections 30 35 35 75,000
Utilities (machine hours) 2,000 7,000 1,000 66,000
Total $510,000
Required
1. Determine the manufacturing cost per unit for each of the products using the volume-based method.
2. What is the least profitable and the most profitable product under both the current and the ABC systems?
3. What is the new target price for each product based on 150% of the new costs under the ABC system?
Compare this price with the actual selling price.
4. Comment on the result from a competitive and strategic perspective. As a manager of Eastern Chemical,
describe what actions you would take based on the information provided by the activity-based unit costs.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
