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Horten Sporting Goods Corporation makes two types of racquets: tennis and badminton. The company uses the same facility to make both products even though the processes are quite different. The company has recently converted its cost accounting system to activity-based costing.

Below are the cost data prepared by Jane Price, the cost accountant, for the third quarter of 2018 (during which Horten made 70,000 tennis racquets and 30,000 badminton racquets):

**Direct Costs:**

- **Tennis Racquet (TR):**
- Direct materials: $28 per unit
- Direct labor: $34 per unit

- **Badminton Racquet (BR):**
- Direct materials: $20 per unit
- Direct labor: $28 per unit

**Activity-Based Costs:**

| Category | Estimated Cost | Cost Driver | Amount of Cost Driver |
|---------------|----------------|----------------------------|-------------------------------|
| Unit level | $750,000 | Number of inspection hours | TR: 15,000 hours; BR: 10,000 hours |
| Batch level | $250,000 | Number of setups | TR: 80 setups; BR: 45 setups |
| Product level | $150,000 | Number of TV commercials | TR: 4; BR: 1 |
| Facility level| $650,000 | Number of machine hours | TR: 30,000 hours; BR: 35,000 hours |

**Total Estimated Cost: $1,800,000**

Inspectors are paid according to the number of actual hours worked, which is determined by the number of racquets inspected. Engineers who set up equipment for both products are paid monthly salaries. TV commercial fees are paid at the beginning of the quarter. Facility-level cost includes depreciation of all production equipment.

**Required:**

1. Compute the cost per unit for each product.
2. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer :

The cost per unit for tennis and badminton racquets is $76.72 and $73.67, respectively.

The company should set the price of the badminton racquets at approximately $95.77.

To compute the cost per unit for each product, we need to consider both the direct costs and the activity-based costs associated with each product. Here's a step-by-step breakdown of the calculations:

Direct Costs

Tennis Racquet (TR)

Direct materials: $28 per unit
Direct labor: $34 per unit
Total direct cost per unit (TR): $28 + $34 = $62

Badminton Racquet (BR)

Direct materials: $20 per unit
Direct labor: $28 per unit
Total direct cost per unit (BR): $20 + $28 = $48

Activity-Based Costs

The activity-based costs need to be allocated to each product based on the cost drivers. Here's the breakdown for each activity level:

Unit Level

Total cost: $750,000
Number of inspection hours:

  • TR: 15,000 hours
  • BR: 10,000 hours
    Total inspection hours: 25,000 hours
    Cost per inspection hour: $750,000 / 25,000 = $30 per hour

Allocation:

  • TR: 15,000 hours * $30/hour = $450,000
  • BR: 10,000 hours * $30/hour = $300,000

Cost per unit:

  • TR: $450,000 / 70,000 units = $6.43 per unit
  • BR: $300,000 / 30,000 units = $10 per unit

Batch Level

Total cost: $250,000
Number of setups:

  • TR: 80 setups
  • BR: 45 setups
    Total setups: 125 setups
    Cost per setup: $250,000 / 125 = $2,000 per setup

Allocation:

  • TR: 80 setups * $2,000 = $160,000
  • BR: 45 setups * $2,000 = $90,000

Cost per unit:

  • TR: $160,000 / 70,000 units = $2.29 per unit
  • BR: $90,000 / 30,000 units = $3 per unit

Product Level

Total cost: $150,000
Number of TV commercials:

  • TR: 4
  • BR: 1
    Total TV commercials: 5
    Cost per commercial: $150,000 / 5 = $30,000 per commercial

Allocation:

  • TR: 4 * $30,000 = $120,000
  • BR: 1 * $30,000 = $30,000

Cost per unit:

  • TR: $120,000 / 70,000 units = $1.71 per unit
  • BR: $30,000 / 30,000 units = $1 per unit

Facility Level

Total cost: $650,000
Number of machine hours:

  • TR: 30,000 hours
  • BR: 35,000 hours
    Total machine hours: 65,000 hours
    Cost per machine hour: $650,000 / 65,000 = $10 per hour

Allocation:

  • TR: 30,000 hours * $10/hour = $300,000
  • BR: 35,000 hours * $10/hour = $350,000

Cost per unit:

  • TR: $300,000 / 70,000 units = $4.29 per unit
  • BR: $350,000 / 30,000 units = $11.67 per unit

Total Costs per Unit

Summing up all the costs:

Tennis Racquet (TR)

  • Direct cost: $62
  • Unit level: $6.43
  • Batch level: $2.29
  • Product level: $1.71
  • Facility level: $4.29

Total cost per unit for TR: $62 + $6.43 + $2.29 + $1.71 + $4.29

Total cost per unit for TR = $76.72

Badminton Racquet (BR)

  • Direct cost: $48
  • Unit level: $10
  • Batch level: $3
  • Product level: $1
  • Facility level: $11.67

Total cost per unit for BR: $48 + $10 + $3 + $1 + $11.67

Total cost per unit for BR = $73.67

Pricing Strategy for Badminton Racquets

If management wants to price the badminton racquets 30 percent above cost:

Cost per unit (BR): $73.67

Desired markup: 30% of $73.67

= $73.67 * 0.30

= $22.10

Price per unit for BR:

= $73.67 + $22.10

= $95.77

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Rewritten by : Barada