Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4)
Redwood Company sells craft kits and supplies to retail outletsand through its catalog. Some of the items are manufactured byRedwood, while others are purchased for resale. For the products itmanufactures, the company currently bases its selling prices on aproduct-costing system that accounts for direct material, directlabor, and the associated overhead costs. In addition to theseproduct costs, Redwood incurs substantial selling costs, and RogerJackson, controller, has suggested that these selling costs shouldbe included in the product pricing structure.
After studying the costs incurred over the past two years forone of its products, skeins of knitting yarn, Jackson has selectedfour categories of selling costs and chosen cost drivers for eachof these costs. The selling costs actually incurred during the pastyear and the cost drivers are as follows:
| Cost Category | Amount | Cost Driver |
| Sales commissions | $ | 811,500 | | Boxes of yarn sold to retailstores |
| 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 | $ | 1,513,520 | | |
|
The knitting yarn is sold to retail outlets in boxes, eachcontaining 12 skeins of yarn. The sale of partial boxes is notpermitted. Commissions are paid on sales to retail outlets but noton catalog sales. The cost of catalog sales includes telephonecosts and the wages of personnel who take the catalog orders.Jackson believes that the selling costs vary significantly with thesize of the order. Order sizes are divided into three categories asfollows:
| Order Size | CatalogSales | RetailSales |
| Small | 1–10skeins | 1–10 boxes |
| Medium | 11–20skeins | 11–20boxes |
| Large | Over 20skeins | Over 20boxes |
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An analysis of the previous year’s records produced thefollowing statistics.
| Order Size | |
| Small | Medium | Large | Total |
| Retail sales in boxes (12 skeinsper box) | 2,500 | 72,000 | 196,000 | 270,500 |
| Catalog sales in skeins | 97,000 | 70,000 | 62,000 | 229,000 |
| Number of retail orders | 665 | 3,315 | 7,420 | 11,400 |
| Catalogs distributed | 128,850 | 260,225 | 116,825 | 505,900 |
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Required:
1. Prepare a schedule showing Redwood Company’stotal selling cost for each order size and the per-skein sellingcost within each order size. (Round your intermediatecalculations and unit cost per order to 2 decimalplaces.)
2. An analysis of selling costs shows.(You may select more than one answer. Single click the boxwith the question mark to produce a check mark for a correct answerand double click the box with the question mark to empty the boxfor a wrong answer. Any boxes left with a question mark will beautomatically graded as incorrect.)
Management may want to consider offering discounts for largeorders.checked
Small orders are preferable to medium sizedorders.unanswered
Large orders are preferable to medium sized orders.checked
Marketing should be focused on small sized orders.
