Chapter 12, Problem 19P

Problem 4-22A Allocating indirect costs between products

Hannah Ortega is considering expanding her business. She plans to hire a salesperson to cover trade shows. Because of compensation, travel expenses, and booth rental, fixed costs for a trade show are expected to be $7,500. The booth will be open 30 hours during the trade show. Ms. Ortega also plans to add a new product line, ProOffice, which will cost $150 per package. She will continue to sell the existing product, EZRecords, which costs $100 per package. Ms. Garcia believes that the salesperson will spend approximately 20 hours selling EZRecords and 10 hours marketing ProOffice.

Required

1. a. Determine the estimated total cost and cost per unit of each product, assuming that the salesperson is able to sell 80 units of EZRecords and 50 units of ProOffice.
2. b. Determine the estimated total cost and cost per unit of each product, assuming that the salesperson is able to sell 200 units of EZRecords and 100 units of ProOffice.
3. c. Explain why the cost per unit figures calculated in Requirement a are different from the amounts calculated in Requirement b. Also explain how the differences in estimated cost per unit will affect pricing decisions.