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Solved: West Chemical Company produces three products

The operating res

West Chemical Company produces three products. The operating results of 2010 are:

The firm sets the target price of each product at 150 percent of the product’s total
manufacturing cost. Recognizing that the firm was able to sell Product C at a much higher price
than the target price of the product and lost money on Product B, Tom Watson, CEO, wants to
promote Product C much more aggressively and phase out Product B. He believes that the
information suggests that Product C has the greatest potential among the firm’s three products
since the actual selling price of Product C was almost 50 percent higher than the target price
while the firm was forced to sell Product B at a price below the target price. Both the budgeted
and actual factory overheads for 2010 are $493,000. The actual units sold for each product also
are the same as the budgeted units. The firm uses direct labor dollars to assign manufacturing
overhead costs. The direct materials and direct labor costs per unit for each product are:

The controller noticed that not all products consumed factory overhead similarly. Upon further
investigations, she identified the following usage of factory overhead during 2010:

Required
1. Determine the manufacturing cost per unit for each of the products using the volume-based
method.
2. What is the least profitable and the most profitable product under both the current and the
ABC costing systems?
3. What is the new target price for each product based on 150 percent of the new costs under
the ABC system? Compare this price with the actual selling price.
4. Comment on the result from a competitive and strategic perspective. As a manager of West
Chemical, describe what actions you would take based on the information provided by the
activity-based unitcosts.

ANSWER
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