Activity-Based Costing: Palmer Company
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Palmer Company uses an activity-based costing system. It has the following manufacturing activity areas, related drivers used as allocation bases, and cost allocation rates:
Activity Cost Driver Cost Allocation Rate
Machine Setup Number of setups $50.00
Material handling Number of parts 0.50
Machining Machine hours 26.00
Assembly Direct labor hours 22.00
Inspection Number of finished units 12.00
During the month, 100 units were produced, requiring two setups. Each unit consisted of 19 parts, used 1.5 direct labor hours, and 1.25 machine hours. Direct materials plus direct labor cost $100 per finished unit. All other manufacturing costs are classified as conversion costs. ABC costs for research and marketing costs are $140. All other non-manufacturing ABC costs are $320 per unit.
A. Calculate the manufacturing cost per unit for the period.
B. Calculate the total cost (manufacturing and non-manufacturing costs) per unit for the period.
C. Suppose Palmer Company's managers want to implement target costing. Under target costing, the managers need to determine the amount of cost savings that must be achieved to earn a desired level of profit. If they must set a competitive price of $650 and require a 10% profit based on the total cost calculated in part (B), how much cost savings must they generate?
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