Question

ack Inc. manufactures two products and uses an activity-based costing system. Jack currently classifies machine setup costs of $120,000 as batch-level.

	Product A	Product B
Units	50,000	75,000
Batches	100	400
Direct Materials	$10 per unit	$10 per unit
Direct Labour	$15 per unit	$15 per unit

What will be the effect on the unit cost of Product A if Jack classifies the machine setup costs as product-level?

Select one:

a. It will decrease by $0.72

b. It will increase by $0.48

c. It will increase by $0.72

d. There will be no effect

Answer 1

Answer:

Correct answer is:

c. It will increase by $0.72

Explanation:

Setup cost per unit of Product A when machine setup costs are classified as batch-level cost:

Number of batches = 100 + 400 = 500

Activity rate for setup cost = 120000 / 500= $240 per batch

Setup cost assigned to Product A = 240 * 100 = $24,000

Setup cost per unit of Product A = 24000 / 50000 = $0.48

Setup cost per unit of Product A when machine setup costs are classified as Product level cost:

Number of products = 2

Activity rate for setup cost = 120000 / 2= $60,000 per product

Setup cost assigned to Product A = 60000 * 1 = $60,000

Setup cost per unit of Product A = 60000 / 50000 = $1.20

Increase in setup cost per unit of Product A = 1.20 - 0.48 = $0.72

Increase in setup cost per unit of Product A = $0.72

As such option c is correct and other options a, b, and d are incorrect.