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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. The following are the cost data that Jane Price, the cost accountant, prepared for the third quarter of the year (during which Horten made 70,000 tennis racquets and 30,000 badminton racquets).

**Direct Cost**
- Tennis Racquet (TR)
- Badminton Racquet (BR)
- Direct materials: $28 per unit, $20 per unit
- Direct labor: $34 per unit, $28 per unit

**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: $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:**
A. Compute the cost per unit for each product.
B. If management wants to price badminton racquets 30 percent above cost, what price should the company set?

Answer :

To solve the problem and find the cost per unit for each product, we'll follow these steps:

A. Compute the Cost Per Unit for Each Product:

We'll use an activity-based costing (ABC) method for this calculation. ABC assigns costs based on activities and the usage of each product.

  1. Direct Costs per Unit:

    • Tennis Racquet (TR):

      • Direct materials: $28
      • Direct labor: $34
      • Total: $62 per unit

    • Badminton Racquet (BR):

      • Direct materials: $20
      • Direct labor: $28
      • Total: $48 per unit

  2. Activity-Based Costs Allocation:

    a. Unit Level Costs:

    • Total unit level costs: $750,000
    • Inspection hours for TR: 15,000
    • Inspection hours for BR: 10,000

    The cost rate per inspection hour = $750,000 / (15,000 + 10,000) = $30 per hour

    TR unit level cost = 15,000 hours * $30 / 70,000 racquets = $6.43 per unit

    BR unit level cost = 10,000 hours * $30 / 30,000 racquets = $10 per unit

    b. Batch Level Costs:

    • Total batch costs: $250,000
    • Setups for TR: 80
    • Setups for BR: 45

    The cost per setup = $250,000 / (80 + 45) = $2,000 per setup

    TR batch level cost = 80 setups * $2,000 / 70,000 racquets = $2.29 per unit

    BR batch level cost = 45 setups * $2,000 / 30,000 racquets = $3 per unit

    c. Product Level Costs:

    • Total product costs: $150,000
    • TV commercials for TR: 4
    • TV commercials for BR: 1

    The cost per commercial = $150,000 / (4 + 1) = $30,000 per commercial

    TR product level cost = 4 commercials * $30,000 / 70,000 racquets = $1.71 per unit

    BR product level cost = 1 commercial * $30,000 / 30,000 racquets = $1 per unit

    d. Facility Level Costs:

    • Total facility level costs: $650,000
    • Machine hours for TR: 30,000
    • Machine hours for BR: 35,000

    The cost per machine hour = $650,000 / (30,000 + 35,000) = $10 per hour

    TR facility level cost = 30,000 hours * $10 / 70,000 racquets = $4.29 per unit

    BR facility level cost = 35,000 hours * $10 / 30,000 racquets = $11.67 per unit

  3. Total Cost per Unit:

    • Tennis Racquet (TR):

      • Total: $62 (direct) + $6.43 (unit) + $2.29 (batch) + $1.71 (product) + $4.29 (facility) = $76.72 per unit

    • Badminton Racquet (BR):

      • Total: $48 (direct) + $10 (unit) + $3 (batch) + $1 (product) + $11.67 (facility) = $73.67 per unit

B. Pricing the Badminton Racquets 30 Percent Above Cost:

To calculate the price set by the company for badminton racquets, if they want a 30% increase over the per-unit cost:

Price = Cost per unit * (1 + 0.30) = $73.67 * 1.30 = $95.77

Thus, the company should set the price of badminton racquets at $95.77.

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Rewritten by : Barada