Gigabyte, Inc. manufactures three products for the computer industry Gismos (pro
ID: 2328746 • Letter: G
Question
Gigabyte, Inc. manufactures three products for the computer industry
Gismos (product G): annual sales, 8,000 units
Thingamajigs (product T): annual sales, 15,000 units
Whatchamacallits (product W): annual sales, 4,000 units
The company uses a traditional, volume-based product-costing system with manufacturing over-head applied on the basis of direct-labor dollars. The product costs have been computed as follows:
Product G Product T Product W
Raw material ....$ 35.00 $52.50 $17.50
Direct labor ............ 16.00 (.8 hr. at $20) 12.00 (.6 hr. at $20) 8.00 (.4 hr. at $20)
Manufacturing overhead* 140.00 105.00 70.00
Total product cost $191.00 $169.50 $95.50
*Calculation of predetermined overhead rate:
Manufacturing overhead budget: Machine setup ......................................................$ 5,250 Machinery ......................................................................................................................1,225,000 Inspection ..........................................................................................................................525,000
Material handling ..............................................................................................................875,000 Engineering ........................................................................................................................344,750
Total .............................................................................................................................$2,975,000
Direct-labor budget (based on budgeted annual sales):
Product G: 8,000 × $16.00=$128,000
Product T: 15,000 × $12.00=180,000
Product W: 4,000 × $8.00= 32,000
Total $340,000
Predetermined overhead rate = Budgeted overhead/ Budgeted direct labor = 875%
Gigabyte’s pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following:
Product G Product T Product W
Product cost ........................$ 191.00 $169.50 $95.50
Target price ............................286.50 254.25 143.25
Actual current selling price ....213.00 254.25 200.00
Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte, Inc. has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabyte’s competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself.
Required:
1. Is product G the company’s least profitable product?
2. Is product W a profitable product for Gigabyte, Inc.?
.3. Comment on the reactions of Gigabyte’s competitors to the firm’s pricing strategy. What dangers does Gigabyte, Inc. face?
4. Gigabyte’s controller, Nan O’Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte’s management to understand its product costs better. She got top management’s approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabyte’s product lines. These data are summarized as follows:
Activity Cost Pool Cost Driver Product G Product T Product W
Machine setup Number of setups 20% 30% 50%
Machinery Machine hours 25% 50% 25%
Inspection Number of inspections 15% 45% 40%
Material handling Raw-material costs 25% 69% 6%
Engineering Number of change orders 35% 10% 55%
Show how the controller determined the percentages given above for raw-material costs. (Round to the nearest whole percent.)
5. Develop product costs for the three products on the basis of an activity-based costing system. (Round to the nearest cent.)
6. Calculate a target price for each product, using Gigabyte’s pricing formula. Compare the new tar-get prices with the current actual selling prices and previously reported product costs.
7. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (5) and (6) above. Show how the solution will change if the inspection activity was divided among the three products in the following manner: product G, 20%; product T, 40%, and product W, 40%.
Explanation / Answer
Requirement 1 Yes, as per traditional volume based costing system which is applied currently The product G is the least profitable product. The calcluation is as follows Product G Product T Product W Current selling price 213 254.25 200 Less : Product cost 191 169.5 95.5 Profit 22 84.75 104.5 2 Yes , product W is profitable product as per above calculations which based on tradition volume based costing system applied currently in the company 3 Gigabyte Inc's competitors will comes to know that Selling price arrived by the company is flawed. The Gigabyte Inc faces the risk of eliminating the some of the products, if they carry on with this flawed pricing strartgy 4 Raw materials costs is used as cost driver for application of material handling costs 5 Product costs for the three products on the basis of of an activity based costing system. Activity costpool Cost driver Total Product G Product T Product W Machine setup Number of setups 100% 20% 30% 50% 5250 1050 1575 2625 Machinery Machine hours 100% 25% 50% 25% 1225000 306250 612500 306250 Inspection Number of Inspections 100% 15% 45% 40% 525000 78750 236250 210000 Material handling Raw Material costs 100% 25% 69% 6% 875000 218750 603750 52500 Engineering Number of change orders 100% 35% 10% 55% 344750 120662.5 34475 189612.5 Total 2975000 725462.5 1488550 760987.5 Total units to be sold 8000 15000 4000 manufacturing overhead unit cost 90.68281 99.23667 190.2469 Add : Raw Materials cost 35 52.5 17.5 Add: Direct Labor cost 16 12 8 Total manufacturing unit cost 141.6828 163.7367 215.7469 6 Target price for each product Product G Product T Product W Manufacturing unit cost as calculated above 141.6828 163.7367 215.7469 Target price=150% of product cost 212.5242 245.605 323.6203 Comparasion of product cost under activity based costing and traditional costing Product G Product T Product W Product cost as per activity based costing system 141.6828 163.7367 215.7469 Product cost as per trading costing system 191 169.5 95.5 Difference 49.31719 5.763333 -120.247 Comparasion of sellignprice under activity based costing and traditional costing Product G Product T Product W Selling price as per activity based costing system 212.5242 245.605 323.6203 Sellign price as per trading costing system 213 254.25 200 Difference 0.475781 8.645 -123.62 As per chegg policy we are supposed to answer maximum of 4 question at a time Thank You
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.