Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of the items are manufactured by Redwood, while others are purchased for resale. For the products it manufactures, the company currently bases its selling prices on a product-costing system that accounts for direct material, direct labor, and the associated overhead costs. In addition to these product costs, Redwood incurs substantial selling costs, and Roger Jackson, controller, has suggested that these selling costs should be included in the product pricing structure.

Robert Adams and Ray Carter “United Technologies’ Activity-Based Accounting Is a Catalyst for Success.” Easy as ABC 18, p4, United Technologies uses the term ‘structural-level activity.” instead of ‘facility-level activity” as we have done in the chapter and in the table presented here.

After studying the costs incurred over the past two years for one of its products, skeins of knitting yarns Jackson has selected four categories of selling costs and chosen cost drivers for each of these costs. The selling costs actually incurred during the past year and the cost drivers are as follows:

The knitting yarn is sold to retail outlets in boxes, each containing 12 skeins of yarn. The sale of partial boxes is not permitted. Commissions re paid on sales to retail outlets but not on catalog sales. The cost of catalog sales includes telephone costs and the wages of personnel who take the catalog orders. Jackson believes that the selling costs vary significantly with the size of the order. Order sizes are divided into three categories as follows:

An analysis of the previous year’s records produced the following statistics. 

Required:

1. Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per- skein selling cost within each order size.

2. Explain how the analysis of the selling costs for skeins of knitting yarn is likely to impact future pricing and product decisions at Redwood Company.

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Cost Category Sales commissions Catalogs . Cost of catalog sales Credit and collection Amount Cost Driver $ 675,000 Boxes of yam sold to retail stores 295,400 Catalogs distributed 105,000 Skeins sold through catalog 60,000 Number of retail orders Total selling costs $1,135,400