Question

Westmorland makes ink that it uses in ball point pens. The Company produces two colors of ink. One is blue the other is red. Ink is made in batches with setup costs being $4,200 per batch. Demand for blue ink is significantly stronger than for red ink. During the most recent week, the company made 2 batches of ink, one blue the other red. It requires 1 hour of labor to make a gallon of ink regardless of color. There were 800 hours of labor used to make the blue ink and the 600 hours of labor used to make the red ink. If the Company uses activity-based costing and allocates the setup cost on the basis of the number of batches, the setup cost allocated to the Please show your work.

Multiple Choice

blue ink is $3,600 and red ink is $4,800.

blue ink is $4,200 and red ink is $4,200.

blue ink is $4,800 and red ink is $3,600.

blue ink is $8,400 and red ink is zero.

Answer 1

Setup Cost per batch = $4,200

Total batches = 2

Cost for 2 batches = 2 X $4,200 per batch

= $8,400

Of total 2 batches, 1 batch is for blue ink and 1 batch is for red ink.

Setup cost allocation:

Blue ink:

= $8,400 X 1/2

= $4,200

Red ink:

= $8,400 X 1/2

= $4,200

blue ink is $4,200 and red ink is $4,200.