Question

Madison Electric Pump Corporation manufactures electric pumps for commercial use. The company produces three models, designated as regular, advanced, and deluxe. The company uses a job-order cost accounting system with manufacturing overhead applied on the basis of direct-labor hours. The system has been in place with little change for 25 years. Product costs and annual sales data are as follows:


For the past 10 years, the company’s pricing formula has been to set each product’s target price at 110 percent of its full product cost. Recently, however, the regular-model pump has come under increasing price pressure from offshore competitors. The result was that the price on the regular model has been lowered to $220.
The company president recently asked the controller, “Why can’t we compete with these other companies? They’re selling pumps just like our regular model for $212. That’s only two bucks more than our production cost. Are we really that inefficient? What gives?” The controller responded by saying, “I think this is due to an outmoded product-costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my judgment, our product-costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean.”
Getting the president’s go-ahead, the controller compiled the basic data needed to implement an activity-based costing system. These data are displayed in the following table. The percentages are the proportion of each cost driver consumed by each product line.



Required:
1. Compute the target prices for the three pump models, based on the traditional, volume-based product-costing system.
2. Compute new product costs for the three products, based on the new data collected by the controller. Round to the nearest cent.
3. Calculate a new target price for the three products, based on the activity-based costing system. Compare the new target price with the current actual selling price for the regular model pump.
4. Write a memo to the company president explaining what has been happening as a result of the firm’s traditional volume-based product-costing system.
5. What strategic options does management have? What do you recommend, andwhy?


$1.99
Sales11
Views519
Comments0
  • CreatedApril 22, 2014
  • Files Included
Post your question
5000