Question

Crane Visuals produces Tablets and Books. Total overhead costs traditionally have been allocated on the basis of direct labor hours. After implementing activity-based costing, managers determined the following cost pools and cost drivers. They also decided that general costs should no longer be allocated to products.

Activity Pool		Department Costs				Cost Driver
Binding			$297,000			Number of units
Printing			955,500			Machine hours
Product design			234,000			Change orders
General			727,500			None
Total overhead costs			$2,214,000

Other information is as follows:

		Tablets		Books
Units		62,500		10,000
Direct materials cost per unit		$5.00		$10
Direct labor cost per unit		$4.00		$8.00
Direct labor hours		30,000		19,200
Machine hours		150,000		144,000
Change orders		1,500		2,400

Crane’s managers have gathered the following information about selling and administrative costs.

Activity Pool		Total Cost		Cost Driver
Shipping		$420,000		Pounds shipped
Advertising		187,500		Number of mailings
Commissions		168,125		Sales price
Total selling and administrative costs		$775,625

		Tablets		Books
Weight		20,000 pounds		40,000 pounds
Advertising mailings		25,000		100,000
Sales commission		5% of sales price		8.00% of sales price
Selling price per unit		$40		$174

Using the information given here, calculate the product margin per unit for Tablets and Books using the traditional costing system. (Round all rates and final answers to 2 decimal places, e.g. 15.25.)

		Tablets		Books
Product margin per unit

Answer 1

1. Predetermined overhead rate

Predetermined overhead rate = Total Manufacturing overhead cost / Direct labor hours

Total Manufacturing overhead cost = $2,214,000

Direct Labor hours = 30,000 + 19,200 = 49,200

Predetermined overhead rate = $2,214,000 / 49,200 direct labor hours = $45 per direct labor hour

2. Allocation of overhead cost

Tablets = 30,000 direct labor hours * $45 per direct labor hour = $1,350,000

Books = 19,200 direct labor hours * $45 per direct labor hour = $864,000

3. Overhead cost per unit

Tablets = $1,350,000 / 62,500 Units = $21.60 per unit

Books = $864,000 / 10,000 Units = $86.40 per unit

4. Product Margin per unit

Particulars	Tablets	Books
Selling price per unit	$40.00	$174.00
Less: Product cost per unit
Direct Material cost per unit	$5.00	$10.00
Direct Labor cost per unit	$4.00	$8.00
Overhead cost per unit	$21.60	$86.40
Product Margin per unit	$9.40	$69.60

All the best...