Question

Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:

Activity	Budgeted Cost of Activity	Allocation Base	Predetermined Overhead Allocation Rate
Materials handling	\( 230,000	Number of parts	\)1.50
Assembly	3,200,000	Number of assembling direct labor hours	16.00
Finishing	150,000	Number of finished units*	3.00

*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Product	Total Units Produced	Total Direct materials Costs	Total Direct Labor Costs	Total Number of Parts	Total Assembling Direct Labor Hours
Standard bookcase	3,000	\(54,000	\)67,500	9,000	4,500
Unfinished bookcase	3,500	56,000	52,500	7,000	3,500

Requirements

4. What price should Martin’s managers set for unfinished bookcases to earn a net profit of $19 per bookcase?

Short answer

The sales price for unfinished bookcase: $90

Step-by-step solution

Step-by-Step-SolutionStep 1: Cost-based pricing

Cost-based pricing is the process of setting the price based on the full product cost. Under cost-based pricing desired net profit is added to the full product cost to get the sales price. Full product cost includes all the developing, producing, and delivering costs relating to products or services.

Computation of sales price for unfinished bookcase

Per unit full product cost for unfinished bookcase: $71

Net profit per bookcase: $19

$$\begin{gathered} \mathbf{Sales}\mathbf{}\mathbf{Price}\mathbf{=}\mathbf{Per}\mathbf{}\mathbf{unit}\mathbf{}\mathbf{full}\mathbf{}\mathbf{product}\mathbf{}\mathbf{cost}\mathbf{+}\mathbf{Net}\mathbf{}\mathbf{profit}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{71}\mathbf{+}\mathbf{\$}\mathbf{19} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{90} \end{gathered}$$