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Selling Price

Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs using three activity cost pools. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

Activity Cost Pool Estimated Activity Estimated Overhead Cost
Machine Setups 400 Number of setups 150,000
Quality Control 1,500 Number of inspections 180,000
Other Overhead 30,000 Machine hours 480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

Model #19 Model #36 Model #58
Direct material cost 400 540 310
Direct labor cost 810 600 220
Number of setups 3 1
Number of inspections 3 1
Number of machine hours 8 10

Reference: 8-7

Under the traditional system, what would be the selling price of one unit of Model #36?


Solution Summary

The solution explains how overcosts are allocated under traditional costing and to use the costs in setting up the selling price