Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4) Redwood Company sells craft kits
ID: 2339256 • Letter: E
Question
Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4)
Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of the items are manufactured by Redwood, while others are purchased for resale. For the products it manufactures, the company currently bases its selling prices on a product-costing system that accounts for direct material, direct labor, and the associated overhead costs. In addition to these product costs, Redwood incurs substantial selling costs, and Roger Jackson, controller, has suggested that these selling costs should be included in the product pricing structure.
After studying the costs incurred over the past two years for one of its products, skeins of knitting yarn, Jackson has selected four categories of selling costs and chosen cost drivers for each of these costs. The selling costs actually incurred during the past year and the cost drivers are as follows:
The knitting yarn is sold to retail outlets in boxes, each containing 12 skeins of yarn. The sale of partial boxes is not permitted. Commissions are paid on sales to retail outlets but not on catalog sales. The cost of catalog sales includes telephone costs and the wages of personnel who take the catalog orders. Jackson believes that the selling costs vary significantly with the size of the order. Order sizes are divided into three categories as follows:
An analysis of the previous year’s records produced the following statistics.
Required:
1. Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size. (Round your intermediate calculations and unit cost per order to 2 decimal places.)
2. An analysis of selling costs shows. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
Management may want to consider offering discounts for large orders.checked
Small orders are preferable to medium sized orders.unanswered
Large orders are preferable to medium sized orders.checked
Marketing should be focused on small sized orders.
Cost Category Amount Cost Driver Sales commissions $ 811,500 Boxes of yarn sold to retail stores Catalogs 404,720 Catalogs distributed Cost of catalog sales 206,100 Skeins sold through catalog Credit and collection 91,200 Number of retail orders Total selling costs $ 1,513,520Explanation / Answer
Cost Category
Cost
Cost Driver
cost activity
Cost driver rate (cost /cost activity)
Sales commissions
811,500
Boxes of yarn sold to retail stores
270,500
$ 3.00
Catalogs
404,720
Catalogs distributed
505,900
$ 0.80
Cost of catalog sales
206,100
Skeins sold through catalog
229,000
$ 0.90
Credit and collection
91,200
Number of retail orders
11,400
$ 8.00
Total selling costs
1,513,520
Order Size
Small
Medium
Large
Sales commissions
Retail sales in boxes (12 skeins per box)
2,500
72,000
196,000
Cost driver rate
3.00
3.00
3.00
cost allocated (multiply of both)
7500
216000
588000
Catalogs
Catalogs distributed
128850
260225
116825
Cost driver rate
0.80
0.80
0.80
cost allocated (multiply of both)
103080
208180
93460
Cost of catalog sales
Catalog sales in skeins
97000
70000
62000
Cost driver rate
0.90
0.90
0.90
cost allocated (multiply of both)
87300
63000
55800
Credit and collection
Number of retail orders
665
3315
7420
Cost driver rate
8.00
8.00
8.00
cost allocated (multiply of both)
5320
26520
59360
Order Size
Small
Medium
Large
Total
Sales commissions
7500
216000
588000
811500
Catalogs
103080
208180
93460
404720
Cost of catalog sales
87300
63000
55800
206100
Credit and collection
5320
26520
59360
91200
Total selling costs
203200
513700
796620
1513520
Total sales in skeins
127000
934000
2414000
selling cost per skeins
(Total selling costs / Total sales in skeins)
$ 1.60
$ 0.55
$ 0.33
Small
Medium
Large
Retail sales in boxes
2,500
72,000
196,000
skins per box
12
12
12
Retail sales in skins (multiply of both)
30000
864000
2352000
Retail sales in skins
30000
864000
2352000
Catalog sales in skeins
97000
70000
62000
Total sales in skeins
127000
934000
2414000
analysis of selling costs shows
Remarks
Management may want to consider offering discounts for large orders
because selling cost per skeins is lower, and higher volume of sales.
Large orders are preferable to medium sized orders
large order size cost is lower.
Cost Category
Cost
Cost Driver
cost activity
Cost driver rate (cost /cost activity)
Sales commissions
811,500
Boxes of yarn sold to retail stores
270,500
$ 3.00
Catalogs
404,720
Catalogs distributed
505,900
$ 0.80
Cost of catalog sales
206,100
Skeins sold through catalog
229,000
$ 0.90
Credit and collection
91,200
Number of retail orders
11,400
$ 8.00
Total selling costs
1,513,520