Eastem Chemical Company produces three products. The operating results of the current year are:
Sales
Product
Target
Actual
Difference
Quantity
Price
Price
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 manufacturing cost. It 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
Number of setups
2
5
3
Weight of direct materials (pounds)
400
250
350
Waste and hazardous disposals
25
45
30
Quality inspections
30
35
35
Utilities (machine hours)
2,000
7,000
1,000
Total
Required:
1. Determine the manufacturing cost per unit for each of the products using the volume-based method.
2. What are the least profitable and the most profitable products 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.
Total
Overhead
$9,000
110,000
250,000
75,000
66,000
$510,000
