Assignment
Step 1: Allocate Costs
You have been asked to look at production options for the Android01 since production methods and allocation of costs have implications for cost-per-unit. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.
Production A
Costs are as follows:
$4.5 million per year in rent for factory and machinery components and labor in the amount of $12 million will produce 300 units per year
Production B
In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.
The variable cost of the production facilities and service divisions is $20 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.
Sq. Ft. Labor
Processor01 (500 units) 70,000 120
Android01 (300 units) 30,000 80
The remaining cost for the production of Android01 is for components, at $25,000 per unit.
Question 1: In Method B, what would be the cost-per-unit of producing Android01 using factory space as the allocation basis? What would be the cost-per-unit using labor as the allocation basis?
Step 2: Activity-Based Costing
An alternate method of assigning costs is activity-based costing. The major activity for the production of both Processor01 and Android01 is component assembly. There will be a total of 125,000 assemblies per year for the production of 500 units of Processor01 and 300 units of Android01 at a total cost of $25 million. Each unit of Android01 will require 180 assemblies. The remaining cost for the production of Android01 is for components, at $25,000 per unit.
Review:
Section 4.1, Activity-Based Costing and Management and Section 4.2, Activity Based-Costing Method
Question 2: What would be the cost per unit of producing Android01 using activity-based costing?
Submit your Activity-Based Costing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.
Step 3: Markup Pricing
Suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost-per-unit is $48,000.
Question 3: What is the price of the Android01 at 30 percent markup over full cost?
Submit your Markup Pricing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.