Answer:
a. Identify the cost hierarchy level for each cost category.
Direct materials purses ⇒ Output unit-level cost
Direct materials backpacks ⇒ Output unit-level cost
Direct manufacturing labor purses ⇒ Output unit-level cost
Direct manufacturing labor backpacks ⇒ Output unit-level cost
Setup ⇒ Batch-level cost
Shipping ⇒ Batch-level cost
Design ⇒ Product-sustaining cost
Plant utilities and administration ⇒ Facility-sustaining cost
b.
Setup $64,000 ⇒ number of batches (it's a batch level cost)
Shipping $73,000 ⇒ number of batches (it's a batch level cost)
Design $169,000 ⇒ number of designs (it's logical, design costs must be allocated based on the number of designs)
Plant utilities and administration $221,000 ⇒ hour of production (it involves the whole manufacturing process)
c.
Setup $64,000 / 200 batches = $320 per batch
Shipping $73,000 / 200 batches = $365 per batch
Design $169,000 / 4 designs = $42,250 per design
Plant utilities and administration $221,000 / 4,250 production hours = $52 per production hour
backpacks purses total
Setup $38,400 $25,600 $64,000
Shipping $43,800 $29,200 $73,000
Design $84,500 $84,500 $169,000
Plant U&A $86,580 $134,420 $221,000
totals $253,280 $273,720 $527,000
d.
total production costs for backpacks = $454,995 + $113,000 + $253,280 = $821,275
production costs per unit = $821,275 / 6,175 = $133 per backpack
total production costs for purses = $319,155 + $99,000 + $273,720 = $691,875
production costs per unit = $691,875 / 3,075 = $225 per purse
e. in order to reduce setup and shipping costs, the company needs to produce in larger batches so the total number of batches decreases.
