Lundy Chemical Company produces a variety of products. Traditionally, the company has established base pricing for...

 

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Lundy Chemical Company produces a variety of products. Traditionally, the company has established base pricing for its products as 200% of the full manufacturing cost. However, one product-Thingamabobs-has no direct competition and is in such great demand that the company has been able to successfully sell it for $350 even though the pricing formula just described would suggest that it sell for less than that figure. Recognizing the success of Thingamabobs in the marketplace, the company's VP of Sales wants to promote it much more aggressively so that the company can phase out its less successful products in hopes of increasing overall company profits. The company's existing cost system assigns its $600,000 in overhead to products using a single company-wide rate equal to 6 times direct labor costs. Unit prime costs (i.c., direct materials and direct labor) for Thingamabobs (which sells for $350) include $50 for direct materials and $8 for direct labor. Though there is no question to this effect, you should ponder the implications of these questions for managerial decision-making. Were the managers misled by their traditional cost systems? Could they have known, beyond just a "gut feel," that they were being misled in the absence of the analysis presented in Question 16? In sum, can you see how this problem was derived from Cooper's work? 13. 14. Using the existing cost system, what is the perceived (a) full product cost and (b) profitability per unit, given the current selling price of $350, for Thingamabobs? Remember to include the prime costs in the full product cost. Show your work. a. Perceived full product cost per unit: b. Continuing with the information for Lundy, now consider what would happen if an activity-based cost system were in place. Assume that the $600,000 in total overhead has been assigned to four homogenous cost pools (with resulting pool rates) as follows: a. Perceived profitability per unit: b. Cost Pool Materials handling Waste disposal Quality control Utilities Total Costs in Pool $200,000 155,000 80,000 165,000 $600,000 ii) Cost Driver and Rate $300 per pounds of materials The entire Thingamabobs product line involves 500 pounds of materials, necessitates 20 disposals, requires 10 inspections, and uses 1,000 machine hours. Determine the overhead cost assignment in total to the Thingamabobs product line. Show your work. $2,000 per disposal $800 per inspection $15 per machine hour Assume that there are there are 500 units of Thingamabobs currently produced and sold. Given your answer to the preceding part and the prime costs provided in the original data, (a) what full product cost per unit is suggested by the ABC system and (b) what is the resulting profitability per unit given the current selling price of $350? Show your work. i) Suggested profitability per unit: Suggested full product cost per unit: Lundy Chemical Company produces a variety of products. Traditionally, the company has established base pricing for its products as 200% of the full manufacturing cost. However, one product-Thingamabobs-has no direct competition and is in such great demand that the company has been able to successfully sell it for $350 even though the pricing formula just described would suggest that it sell for less than that figure. Recognizing the success of Thingamabobs in the marketplace, the company's VP of Sales wants to promote it much more aggressively so that the company can phase out its less successful products in hopes of increasing overall company profits. The company's existing cost system assigns its $600,000 in overhead to products using a single company-wide rate equal to 6 times direct labor costs. Unit prime costs (i.c., direct materials and direct labor) for Thingamabobs (which sells for $350) include $50 for direct materials and $8 for direct labor. Though there is no question to this effect, you should ponder the implications of these questions for managerial decision-making. Were the managers misled by their traditional cost systems? Could they have known, beyond just a "gut feel," that they were being misled in the absence of the analysis presented in Question 16? In sum, can you see how this problem was derived from Cooper's work? 13. 14. Using the existing cost system, what is the perceived (a) full product cost and (b) profitability per unit, given the current selling price of $350, for Thingamabobs? Remember to include the prime costs in the full product cost. Show your work. a. Perceived full product cost per unit: b. Continuing with the information for Lundy, now consider what would happen if an activity-based cost system were in place. Assume that the $600,000 in total overhead has been assigned to four homogenous cost pools (with resulting pool rates) as follows: a. Perceived profitability per unit: b. Cost Pool Materials handling Waste disposal Quality control Utilities Total Costs in Pool $200,000 155,000 80,000 165,000 $600,000 ii) Cost Driver and Rate $300 per pounds of materials The entire Thingamabobs product line involves 500 pounds of materials, necessitates 20 disposals, requires 10 inspections, and uses 1,000 machine hours. Determine the overhead cost assignment in total to the Thingamabobs product line. Show your work. $2,000 per disposal $800 per inspection $15 per machine hour Assume that there are there are 500 units of Thingamabobs currently produced and sold. Given your answer to the preceding part and the prime costs provided in the original data, (a) what full product cost per unit is suggested by the ABC system and (b) what is the resulting profitability per unit given the current selling price of $350? Show your work. i) Suggested profitability per unit: Suggested full product cost per unit:

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13 Using the existing cost system the perceived full product cost per unit for Thingamabobs can be c... View the full answer