XYZ Inc. has been manufacturing a standard version of digital media player, iPop
ID: 447760 • Letter: X
Question
XYZ Inc. has been manufacturing a standard version of digital media player, iPop, for years. Recently, XYZ Inc. introduced a premium version of digital media player, ePop, to increase product variety. Since the introduction of ePop, the company’s profit has declined steadily despite the rapid increase in the sales of ePop. The management targets to sell the products at 30% markup above their respective product costs. However, the company has not been able to sell iPop at its targeted price due to market competition. The company manages to sell ePop at its targeted selling price due to low competition. XYZ Inc. uses traditional costing system and assigns overheads to its products based on direct labour hours. Manufacturing overhead is estimated to be $2,800,000 in 2013. The management projects to produce and sell 50,000 units of iPop and 8,000 units of ePop in 2013. The cost information of the two products, iPop and ePop, is given as follows: Per Unit iPop ePop Direct Materials $25 $55 Direct labour hours needed* 2 5 Machine hours needed 1 4 *The company pays its direct labourers at $10 per hour The CEO of the company is puzzled by the declining profits since the introduction of ePop. He instructed the CFO to gather additional data for purpose of analyzing the financial results. The CFO has gathered some activity-related data for two products, iPop and ePop, as follows: Activity Level Activity Cost Pool Activity Cost Driver Estimated Manufacturing Overhead $ iPop ePop Machine setup Number of Machine setups 650,000 100 160 Machining time Machine hours 1,640,000 ? ? Material handling Number of purchase orders 138,000 100 176 Quality Inspection Number of quality inspections 72,000 100 80 Engineering Number of engineering orders 300,000 20 30 Required: (a) Compute the unit product cost and targeted selling prices of iPop and ePop using the traditional costing method. (4 Marks) (b) Compute the unit product cost of iPop and ePop using the data collected by the CFO. (8 Marks) (c) Explain why the unit product costs computed under the traditional costing system and the new costing system differ. Why does the company profit decline despite the increase in the sale of ePop? (3 Marks) XYZ Inc. has been manufacturing a standard version of digital media player, iPop, for years. Recently, XYZ Inc. introduced a premium version of digital media player, ePop, to increase product variety. Since the introduction of ePop, the company’s profit has declined steadily despite the rapid increase in the sales of ePop. The management targets to sell the products at 30% markup above their respective product costs. However, the company has not been able to sell iPop at its targeted price due to market competition. The company manages to sell ePop at its targeted selling price due to low competition. XYZ Inc. uses traditional costing system and assigns overheads to its products based on direct labour hours. Manufacturing overhead is estimated to be $2,800,000 in 2013. The management projects to produce and sell 50,000 units of iPop and 8,000 units of ePop in 2013. The cost information of the two products, iPop and ePop, is given as follows: Per Unit iPop ePop Direct Materials $25 $55 Direct labour hours needed* 2 5 Machine hours needed 1 4 *The company pays its direct labourers at $10 per hour The CEO of the company is puzzled by the declining profits since the introduction of ePop. He instructed the CFO to gather additional data for purpose of analyzing the financial results. The CFO has gathered some activity-related data for two products, iPop and ePop, as follows: Activity Level Activity Cost Pool Activity Cost Driver Estimated Manufacturing Overhead $ iPop ePop Machine setup Number of Machine setups 650,000 100 160 Machining time Machine hours 1,640,000 ? ? Material handling Number of purchase orders 138,000 100 176 Quality Inspection Number of quality inspections 72,000 100 80 Engineering Number of engineering orders 300,000 20 30 Required: (a) Compute the unit product cost and targeted selling prices of iPop and ePop using the traditional costing method. (4 Marks) (b) Compute the unit product cost of iPop and ePop using the data collected by the CFO. (8 Marks) (c) Explain why the unit product costs computed under the traditional costing system and the new costing system differ. Why does the company profit decline despite the increase in the sale of ePop? (3 Marks)Explanation / Answer
Predetermined OverHead Rate= Total estimated manufacturing Overhead /
Total estimated amount of the allocation base
= $2,800,000 / 132,000
=$21.21 per Direct Labor
iPop =50,000 units of iPop *2 hours per unit = 100,000
ePop=8,000 units *5=32,000
100,000 + 32,000=132,000 Direct hours
Particulars:::::::::::::::::::::::::::::::::::::::::::::iPop:::::::::::::::::::::::::::::::::::::ePop
Direct Materials:::::::::::::::::::::::::::::::::::::$25:::::::::::::::::::::::::::::::::::::::$55
Direct Labor Unit:::::::::::::::::::::::::::::::::::$10::::::::::::::::::::::::::::::::::::::::$10
Manufacturing Overhead:::::2* $21.21=$42.42:::::::::::::::5* $21.21=$106.05
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Unit Production Cost::::::::::::::::::::::::::$77.42:::::::::::::::::::::::::::::::::$171.05
________________________________________________________________
_________________________________________________________________________
Target Selling Method=Cost + Mark up percentage *Cost = Target Selling Price
iPop = $77.42 + 30%*$77.42 =23.23
= $77.42 + 23.23
=$100.65
ePop= $171.05+ 30% * $171.05=$51.31
=$171.05 + $51.31
=$222.36
Profit =S.P - C.P
iPop= $100.65 - $77.42=$23.23
ePop=$222.36-$171.05
=$51.31
____________________________________________________________________________
ABC
Particulars ::::::::::::::::::::::::::::::::::::::::::::iPop::::::::::::::::::::::::::::::::::::::::::::::::::::ePop
Machine setup =650,000 * 100/260=$250,000:::::::::::::::650,000 * 160/260=$400,000
Machine Hours:::::::::::100,000Hours =$1,242,424:::::::::::::::::32,000 hours=$397,576
Material handling:::::::::138,000*100/276=$50,000:::::::::::::138,000*176/276=$88,000
Quality Inspection:::::::72,000 * 100/180=$40,000::::::::::::::::72,000* 80/180=$32,000
Engineering:::::::::::::::300,000 *20/50=$120,000::::::::::::::::::300,000*30/50=$180,000
_____________________________________________________________________
Cost for full units:::::::::::::::::::::::::::$1,702,424:::::::::::::::::::::::::::::::::::::::::$1,097,576
Cost per unit =$1,702,424/50,000 units=$34:::::::: $1,097,576/8,000 units =$137.20
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Explanation
iPop= Machine Hours=1,640,000*100,000 /132,000=$1,242,424
ePop=Machine Hours=1,640,000*32,000 /132,000=$397,576
________________________________________________________________________________
ABC costing it is used to calculate what are the exclusive expense incurred for the each product, this costing tell us acutal expenses incurred for the each product, this method profit is correct.
Traditional Costing had made overall expense for the each product, it is difficulat to find out what is actual expenses incurred for each product.
As per ABC Costing per unit
iPop profit=S.P -C.P
=$100.65 - $34
=$66.65 increased than tradional method
ePop profit
Profit = S.P- C.P
=$222.36-$137.20
=85.16 increased than tradional method
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