Questions:
(ABC; pricing; cost drivers) Believing that its traditional cost system may be providing misleading information, Dover Corporation is considering an activity-based costing (ABC) approach. Dover Corporation employs a full-cost system and has been applying its manufacturing overhead on the basis of machine hours. The organization plans on using 50,000 direct labor hours and 30,000 machine hours in 2010.The following data show the manufacturing overhead that is budgeted:
|
Activity
|
Budgeted Cost Driver
|
Budgeted Activity Cost
|
|
Material handling
|
Number of parts handled
|
6,000,000
|
$ 720,000
|
|
Setup costs
|
Number of setups
|
750
|
315,000
|
|
Machining costs
|
Machine hours
|
30,000
|
540,000
|
|
Quality control
|
Number of batches
|
500
|
225,000
|
|
Total manufacturing overhead cost
|
|
$1,800,000
|
Cost, sales and production data for one of the company's products for the coming year are as follows:
|
Direct material cost per unit
|
$4.40
|
|
Direct labor cost per unit (.05 DLH @ $15 per DLH)
|
0.75
|
|
Sales and production data:
|
$5.15
|
|
Expected sales
|
20,000 units
|
|
Batch size
|
5,000 units
|
|
Setups
|
2 per batch
|
|
Total parts per finished unit
|
5 parts
|
|
Machine hours required
|
80 MH per batch
|
a. Compute the per-unit cost for this product for 2010 if Dover Corporation uses the traditional full-cost system.
b. Compute the per-unit cost for this product for 2010 if the Dover Corporation employs an activity-based costing system.
c. Assume the company wishes to achieve a gross profit rate of 40 percent. Determine the selling price that would be required based on your answers to (a) and (b).