PART A

Computer Accessories, Inc. manufactures three products for the computer industry. The details of its annual sales are as follows:

Motherboard: annual sales, 8,000 units

Power supply: annual sales, 15,000 units

CPU: annual sales, 4,000 units

Currently, the company uses a traditional, volume-based product-costing system with manufacturing overhead applied based on direct-labor dollars.

The following information are available for each of the product:

	Motherboard	Power Supply	CPU
Raw material per unit	$35.00	$52.50	$17.50
Direct labor rate per hour	$20 per hour	$20 per hour	$20 per hour
Direct labor hour per unit	0.8 hour	0.6 hour	0.4 hour

Additionally, the manufacturing overhead budget is as follows:

Manufacturing overhead budget:

Machine setup $5,250

Machinery 1,225,000

Inspection 525,000

Material handling 875,000

Engineering 344,750

Total Manufacturing overhead cost $2,975,000

Computer Accessories' pricing method has been to set a target price equal to 150 percent of full product cost. However, only the power supply has been selling at their target price. The actual current prices for all three products are the following:

	Motherboard	Power Supply	CPU
Actual current selling price	213.00	254.25	200.00

Computer Accessories has been forced to lower the price of motherboards to get orders. In contrast, Computer Accessories has raised the price of CPU several times, but there has been no apparent loss of sales. Computer Accessories, Inc. has been under pressure to reduce the price even further on motherboard. In contrast, Computer Accessories' competitors do not seem to be interested in the market for CPU. Computer Accessories apparently has this market to itself.

1. Calculate the total product cost per unit and the target prices for each of Computer

Accessories' products using the current pricing policy (show ALL necessary workings)

1. Calculate the actual gross profit for each product. Comment on these profit figures and the current costing system used to calculate these profit figures.
2. Comment on the reactions of Computer Accessories' competitors to the firm's pricing strategy. What dangers does Computer Accessories, Inc. face?
3. Computer Accessories' controller, Ms. Vella Rose, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Computer Accessories' management to understand its product costs better. She got top management's approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Computer Accessories' product lines. These data are summarized as follows:

Activity Cost Pool	Cost Driver	Motherboard	Power Supply	CPU
Machine setup	Number of setups	20%	30%	50%
Machinery	Machine hours	25%	50%	25%
Inspection	Number of inspections	15%	45%	40%
Material handling	Raw-material costs	25%	69%	6%
Engineering	Number of change orders	35%	10%	55%

a.Calculate unit product costs and the target prices for the three products using an activity-based costing system. (Round to the nearest cent.) Show all necessary workings.

PART B

Refer to the product costs developed in requirement (4a).

Draw a table showing how Computer Accessories' traditional, volume-based product-costing system distorts the product costs of motherboard, power supply, and CPU. Discuss the distortions.

PART C

Refer to the new target prices for Computer Accessories' three products, based on the new activity-based costing system in requirement (4a).

note down a memo to the company president commenting on the situation Computer Accessories, Inc. has been facing regarding the market for its products and the actions of its competitors. Discuss the strategic options available to management. What do you recommend, and why?