35PGA-4 - Horngren'S Financial And Managerial Accounting

Question

Question: Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

Activity	Budgeted Cost of Activity	Allocation Base	Predetermined Overhead Allocation Rate
Materials handling	\( 240,000	Number of parts	\)1.00
Assembly	3,500,000	Number of assembling direct labor hours	17.00
Finishing	190,000	Number of finished units*	4.50

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Product	Total Units Produced	Total Direct materials Costs	Total Direct Labor Costs	Total Number of Parts	Total Assembling Direct Labor Hours
Standard bookcase	7,000	\(91,000	\)105,000	28,000	10,500
Unfinished bookcase	7,500	82,500	75,000	22,500	7,500

Requirements

4. What price should Oscar’s managers set for unfinished bookcases to earn a net profit of $19 per bookcase?

Step-by-Step Solution

Answer

Answer

The sales price for unfinished bookcase: $80.93

 

Step 1: Cost-based pricing

Cost-based pricing is the process of setting the price based on the full product cost. Under cost-based pricing desired net profit is added to the full product cost to get the sales price. Full product cost includes all the developing, producing, and delivering costs relating to products or services.   

 

Step 2: Computation of sales price for unfinished bookcase

Per unit full product cost for unfinished bookcase: $61.93

Net profit per bookcase: $19

$$\begin{gathered} \mathbf{\text{Sales price = per unit full product cost + Net profit per unit }} \\ \mathbf{\text{ = \$61.93 + \$19 }} \\ \mathbf{\text{ = \$80.93}} \end{gathered}$$