Multiple Allocation Bases: Refer to integrative case 4-39.

Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable.

Jean Sharpe notices that $30,000 of the overhead originated from the equipment used. She decides to incorporate machine-hours into the overhead allocation base to see its effect on product profitability. Almond Dream requires two hours of machine time, Krispy Krackle requires seven hours and Creamy Crunch requires six hours. Additionally, Jean notices that the $15,000 per month spent on the rental of 10,000 square feet of factory space accounts for almost 22 percent of the overhead. Almond Dream is assigned 1,000 square feet, Krispy Krackle is assigned 4,000 square feet, and Creamy Crunch is assigned 5,000 square feet. Jean decides to incorporate this into the allocation base for the rental costs.

Since labor-hours is an important element of overhead, Jean decides she should use labor-hours to allocate the remaining $24,500.

SSI still plans to produce 1.000 cases each of Almond Dream, Krispy Krackle, and Creamy Crunch. Assume SSI can sell all products it manufactures and that it will use excess capacity, if it drops any products, to produce additional units of the most profitable product. Overhead will remain $69,500 per month under all alternatives.

Required:

a. Based on the additional data, determine the product cost and gross profit margin percentages of each product using the three allocation bases to determine the allocation assigned to each product.

b. Would management recommend dropping any of the products based on the criteria of dropping products with less than 10 percent gross profit margin?

c. Based on the recommendation you make in (b), recalculate the allocations and profit margins to determine whether any of the remaining products should be dropped from the product line. If any additional products are dropped, substanti- ate the profitability of remaining products.