A world-famous photographer of wild animals and nature, Sonja Rego sells framed prints of select photographs over the Internet. Regardless of the picture bought, she offers buyers a choice in framing: a plain black frame or a fancy frame with a certificate of authenticity.
Based on initial cost estimates, Sonja believes the Deluxe frames to be more profitable than the Standard frames. However, her profits have slipped every quarter even as the proportion of Deluxe frames sold has increased. She has asked for your help in figuring out what she might be doing wrong. She provides the following data:

She further informs us that her total overhead is $390,000 per year.

Required:
a. Calculate the profit per unit for the Deluxe and Standard prints, if Sonja allocates overhead using labor hours as the allocation basis.
b. You find that only $156,000 of Sonja€™s cost relates directly to labor. Of the remainder, $136,500 corresponds to batch-level activities and $58,500 to product-level activities. She runs separate batches (50 prints for Deluxe, 250 for Standard) for Deluxe and Standard pictures. The product-level costs, she believes, are equally attributable to both product lines. The remaining facility-level costs relate to the rent on her studio, hosting the Web site, and other such business-sustaining actions.
Prepare an income statement for Sonja, clearly highlighting the allocation from each cost pool.
c. Based on the answers to parts (a) and (b), what insights could you offer toSonja?

Transcribed Image Text:

Deluxe Standard Units/year 1,000 5,00 Price per unit 350 $210 Materials Labor 100 75 65 50