As the marketing manager for Independent Packaging Pty Ltd, you have asked the accountant what it costs to make the Container2000 model because you want to set a price for the container. A similar container produced by a competitor sells for $600. Your usual pricing policy is to set the price of containers at twice the cost of manufacturing them. The accountant has not been entirely helpful in giving you the following costs.

Required

(a) Assuming that the total factory overhead to be allocated to the various container models produced by Independent Packaging Pty Ltd is $2 400 000, what are the implications of allocating too much, or too little, factory overhead to the cost of each Container2000?

(b) Calculate the cost and the price of the Container2000 using each of the factory overhead rates that the accountant has supplied. How do the different allocation methods for factory overhead affect the pricing of the Container2000 compared with the price of the competition, and what are the likely implications of this for how well the phone does in the phone market?

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Direct materials $90 Direct labour $15 If allocated on direct labour hours (DLH), factory overhead per phone is $760 per DLH and each container takes 1/4 DLH to manufacture. If allocated on labour costs, factory overhead per container is 10 times direct labour costs. If allocated on machine hours (MH), factory overhead per container is $400 per MH and each container takes 1/2 MH to manufacture.