Managerial Accounting

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CASE 5-69 (60 minutes) 1. Standard Model Deluxe Model Heavy-Duty Model Product costs based on traditional, volume- based costing system $105.00 $215.00 $232.00 × 110% × 110% × 110% × 110% Target price $115.50 $236.50 $255.20 2. Product costs based on activity-based costing system: Regular Model Standard Model Deluxe Model Direct material $10.00 $ 25.00 $ 42.00 Direct labor 10.00 20.00 20.00 Machinery depreciation and maintenancea 32.00 208.00 75.20 Engineering, inspection and repair of defectsb 17.04 43.50 34.08 Purchasing, receiving, shipping, and material handlingc 15.28 52.00 29.25 Factory depreciation, taxes, insurance, and…show more content…
4. Memorandum Date: Today To: President Morelli Electric Motor Corporation From: I.M. Student Subject: Product costing Based on the cost data from our traditional, volume-based product-costing system, our standard model is not very profitable. Its reported actual gross margin is only $5 ($110 – $105). However, the validity of this conclusion depends on the accuracy of the product costs reported by our product-costing system. Our competitors are selling motors like our standard model for $106. This price suggests that their product cost is substantially below our previously reported cost of $105. Our new activity-based-costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the standard model costs only $96.82, which implies a target price of $106.50. This price is lower than our current actual selling price and consistent with the price our competitors are charging. In contrast, our new product-costing system reveals that the deluxe model's product cost is $437.75 instead of the previously reported cost of $215. The new product cost suggests a target price of $481.53 for the deluxe model, rather than $236.50, which was our previous target price for the deluxe model. 5. The company should

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