# West Chemical Company produces three products. The firm sets the target price of each product at 150%

## Question:

West Chemical Company produces three products. The firm sets the target price of each product at 150% of the product's total manufacturing cost. Recognizing 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, To 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 since the actual selling price of Product C was almost 50 percent 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 2010 are $493,000. The actual units sold for each product also are the same as the budgeted units. The firm uses direct labor dollars to estimate manufacturing overhead costs. The direct materials and direct labor costs per unit for each product are:  Target selling price (% of total mfg. cost) = 150% Budgeted factory overhead =$493,000 Actual factory overhead incurred = $493,000 Actual operating results for 2007 are as follows:  Product Sales Quantity Target Price Actual Price Difference A 1,000$279.00 $280.00$1.00 B 5,000 $294.00$250.00 ($44.00) C 500$199.50 $300.00$100.50

The direct labor and direct materials cost per unit are as follows:

 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 notes that not all of the products consume factory overhead costs similarly. Upon further investigation, she identified the following overhead consumption data for 2007:  Product A Product B Product C Total Overhead Number of setups 2 5 3$8,000 Weight of direct materials (pounds) 400 250 350 $100,000 Waste and hazardous disposals 25 45 30$250,000 Quality inspections 30 35 35 $75,000 Utilities (machine hours) 2,000 7,000 1,000$60,000 TOTAL \$493,000

Required

1. Determine the manufacturing cost per unit for each of the products using the volume-based method.

2. What is the least profitable and the most profitable product under both the current and the ABC costing systems?

3. What is the new target price for each product based on 150 percent of the new costs under the ABC system? Compare this price with the actual selling price.

4. Comment on the result from a competitive and strategic perspective. As a manager of West Chemical, describe what actions you would take based on the information provided by the activity-based unitcosts.

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