Selling Price
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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 activity-based costing system, what would be the selling price of one unit of Model #36?
4,080
5,506
2,536
2,712
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Solution Summary
The solution explains the calculation of unit cost under activity based costing and using it to set the selling price.
Solution Preview
We first calculate the activity rate
Machine Setup = 150,000/400=375
Quality Control = ...
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