Question:
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
|
2
|
3
|
1
|
|
Number of inspections
|
1
|
3
|
1
|
|
Number of machine hours
|
4
|
8
|
10
|
Under the activity-based costing system, what would be the selling price of one unit of Model #36?
A) $2,536
B) $2,712
C) $4,080
D) $5,506