Pricing decisions made with ABC system cost dataSchivo Furniture Corporation makes two typ

Pricing decisions made with ABC system cost data

Schivo Furniture Corporation makes two types of dining tables, Elegance for formal dining and Comfort for casual dining, at its single factory. With the economy beginning to experience a recession,

Justin Schivo, the president, is concerned about whether the company can stay in business as market prices fall. At Mr. Schivo’s request, Jane Walter, the controller, prepared cost data for analysis.

Inspectors are paid according to the number of actual hours worked, determined by the number of tables inspected. Engineers who set up equipment for both products are paid monthly salaries. TV commercial fees are paid at the beginning of the quarter.

 

Direct Cost

Elegance (E)

Comfort (C)

Direct materials

$70 per unit

$43 per unit

Direct labor

$36 per hour × 1.5 hours production time

$36 per hour × 1 hour production time

 

Category

Estimated Cost

Cost Driver

Use of Cost Driver

Product inspection Machine setups Product advertising Facility depreciation$120,000

75,000

210,000

405,000

Number of units Number of setups Number of TV commercials Number of machine hoursE. 2,500 units; C. 7,500 units E. 23 setups; C. 27 setups

E. 5; C. 9

E. 5,000 hours; C. 5,000 hours

Total

$810,000

 

 

Required

a. Compute the cost per unit for each product.

b. If management wants to make 30 percent of cost as a profit margin for Elegance, what price should the company set?

c. The market price of tables in the Comfort class has declined because of the recession. Management asks you to determine the minimum cost of producing Comfort tables in the short term. Provide that information.