Pricing decisions made with ABC system cost dataConor Sporting Goods Corporation makes two

Pricing decisions made with ABC system cost data

Conor 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 Sue Chapman, the cost accountant, prepared for the third quarter of 2007 (during which Conor made 70,000 tennis racquets and 30,000 badminton racquets).

 

Direct Cost

Tennis Racquet (TR)

Badminton Racquet (BR)

Direct materials

$14 per unit

$10 per unit

Direct labor

38 per unit

28 per unit

 

Category

Estimated Cost

Cost Driver

Amount of Cost Driver

Unit level Batch level Product level Facility level

$ 750,000 250,000 150,000 650,000

Number of inspection hours Number of setups Number of TV commercials Number of machine hours

TR. 15,000 hours; BR. 10,000 hours TR. 80 setups; BR. 45 setups TR. 4; BR. 1 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?

c. The market price of tennis racquets has declined substantially because of new competitors entering the market. Management asks you to determine the minimum cost of producing tennis racquets in the short term. Provide that information.

 

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