Chapter 4, Problem 4PSA

1.

To determine

To compute:Cost of each product line.

Explanation of Solution

Given below is the table for the calculation of cost of each product line using ABC:

Total cost of each product line
Particulars	Hi-Voltage			Easy slim
	Activities consumed $$\left(\text{A}\right)$$	Activity rate ($) $\left(\text{B}\right)$	Activity cost allocated ($) $\left(\text{A}\right)\times \left(\text{B}\right)$	Activities consumed $\left(\text{C}\right)$	Activity rate ($) $$\left(\text{D}\right)$$	Activity cost allocated ($) $\left(\text{C}\right)\times \left(\text{D}\right)$
Liquid materials	1,400 gallons	0.06	84	37,000 gallons	0.06	2,220
Dry materials	620 pounds	0.55	341	12,000 pounds	0.55	6,600
Utilities	200 MH	0.36	72	3,750 MH	0.36	1,350
Bottles	12,500 bottles	0.40	5,000	180,000 bottles	0.40	72,000
Labeling	37,500 labels	0.03	1,125	180,000 labels	0.03	5,400
Machine setup	500 setups	25	12,500	300 setups	25	7,500
Total cost			19,122			95,070

Table(1)

Working note:

Calculation of activity rate,

Activity rate
Activity cost pools	Activity measure	Overhead cost assigned to pool ($) $\left(\text{A}\right)$	Number of activities $\left(\text{B}\right)$	Activity rate ($) $\frac{\left(\text{A}\right)}{\left(\text{B}\right)}$
Liquid materials	Gallons	2,304	38,400 gallons	0.06 per gallon
Dry materials	Pounds	6,941	12,620 pounds	0.55 per pound
Utilities	Machine hours	1,422	3,950 MH	0.36 per MH
Bottles	Units	77,000	192,500 bottles	0.40 per bottle
Labeling	Labels per bottle	6,525	217,500 labels	0.03 per label
Machine setup	Setups	20,000	800 setups	25 per setup

Table(2)

Calculation of number of activities,

Number of activities
Activity measure	Hi-Voltage activities $\left(\text{A}\right)$	Easy slim activities $\left(\text{B}\right)$	Number of activities $\left(\text{A}\right)+\left(\text{B}\right)$
Gallons	1,400	37,000	38,400 gallons
Pounds	620	12,000	12,620 pounds
Machine hours	200	3,750	3,950 MH
Units	12,500	180,000	192,500 bottles
Labels	37,500	180,000	217,500 labels
Hi-Voltage $\left(12,500\text{ bottles}\times 3\text{ labels}\right)$
Easy slim $\left(180,000\text{ bottles}\times 1\text{ label}\right)$
Setups	500	300	800 setups

Table(3)

Hence, the total cost of hi-voltage product is $19,122 and easy slim product is $95,070.

2.

To determine

To compute: Cost per bottle for each product.

Explanation of Solution

Calculate cost per bottle for Hi-Voltage.

Given,
Total cost of Hi-Voltage is $19,122.
Number of bottles of Hi-Voltage is 12,500 bottles.

Formula for computation of cost per bottle,

   $\text{Cost per bottle}=\frac{\text{Total cost of Hi-Voltage}}{\text{Number of bottles of Hi-Voltage}}$

Substitute $19,122 for the value of total cost of Hi-Voltage and 12,500 for the value of number of bottles of Hi-Voltage.

   $\begin{array}{c}\text{Cost per bottle}=\frac{\text{\$19,122}}{12,500}\\ =\$1.53\end{array}$

Calculate cost per bottle for easy slim.

Given,
Total cost of Easy slim is $95,070.
Number of bottles of Easy slim is 180,000 bottles.

Formula for computation of cost per bottle,

   $\text{Cost per bottle}=\frac{\text{Total cost of easy}\text{slim}}{\text{Number of bottles of easy}\text{slim}}$

Substitute $95,070 for the value of total cost of easy slim and 180,000 for the value of number of bottles of easy slim.

   $\begin{array}{c}\text{Cost per bottle}=\frac{\text{\$95,070}}{180,000}\\ =\$0.53\end{array}$

Hence, cost per bottle of Hi-Voltage is $1.53 and Easy slim is $0.53.

3.

To determine

To compute: Profit per bottle of Hi-Voltage.

Explanation of Solution

Calculateprofit per bottle of High-Voltage.

Given,
Selling price per bottle is $3.75.
Cost per bottle is $1.53.

Formula for computation profit per bottle of Hi-Voltage:

   $\text{Profit per bottle}=\text{Selling price per bottle}-\text{Cost per bottle}$

Substitute $3.75 for the value of selling price per bottle and $1.53 for the value of cost per bottle.

   $\begin{array}{c}\text{Profit per bottle}=\text{\$3}\text{.75}-\$1.53\\ =\$2.22\text{ per bottle}\end{array}$

Hence,profit per bottle of hi-voltage is $2.22.

4.

To determine

To compute: Minimum price per bottle of easy slim.

Explanation of Solution

• The cost per bottle of easy slim is $0.53, so the Company should set a price which covers the cost of bottle and also earns a minimum rate of return over and above the cost per bottle.
• B Company should set a minimum selling price of $0.54 which is higher than $0.53 and will get the company minimum rate of return.

Hence, B Company should set a minimum selling price of $0.54.