Chapter 19, Problem 23E

Treat Dog Collars uses activity-based costing. Treat’s system has the following features:

 Each collar has three parts, direct materials cost is $5.00 per collar, and direct labor cost is $4.00 per collar. Suppose Animal Hut has asked for a bid on 30,000 dog collars. Treat will issue a total of 175 purchase orders if Animal Hut accepts Treat’s bid.

Requirements

1. 1. Compute the total estimated cost Treat will incur to purchase the needed materials and then assemble and package 30,000 dog collars. Also compute the cost per collar.
2. 2. For bidding, Treat adds a 40% markup to total cost. What total price will the company bid for the entire Animal Hut order?
3. 3. Suppose that instead of an ABC system, Treat has a traditional product costing system that allocates indirect costs at the rate of $9.50 per direct labor hour. The dog collar order will require 9,000 direct labor hours. What total price will Treat bid using this system’s total cost?
4. 4. Use your answers to Requirements 2 and 3 to explain how ABC can help Treat make a better decision about the bid price it will offer Animal Hut.