As part of the restructuring exercise in your galvanized tin firm, you have been assigned to the marketing division where your role will be to advise on the pricing and costing of the firm’s two new products. These products will be produced to two different quality standards, with the higher quality product having a higher price. As part of your preparation, you attended a costing program where you learned about product cost and behavior and cost-volume-profit (CVP) analysis.

The survey on the proposed new products shows relative acceptance by the market, and the company has decided to go ahead with the new products. They don’t want to be overly dependent on the existing product, which has seen some dwindling interest from the market. The company is also aware that the introduction of new products will require additional fixed costs such as depreciation of new machinery, deployment of a semi-skilled work force, and rental of new production premises. The allocation of additional fixed costs has been fixed for the two products: the higher quality product will take up three quarters of the total fixed costs, which the management believes will reflect a more pragmatic costing of the new products.

The management would like you to present how the new fixed cost allocation has affected the products’ competiveness, including the new products’ breakeven structure.

In your effort to report a feasible breakeven pattern of both new products, you have changed the proposed allocation of the additional fixed cost from the existing structure to the ratio of 50:50 to both products without the knowledge of the management team.

Requirements 

1. Discuss your ethical responsibilities. 

2. Show how the new allocation of fixed costs would have an impact on the product breakeven structure and the company’s operating income. 

3. Discuss the long term impact of your decision to alter the allocations on the business.

Also, what does the fact that you were able to change it reveal about the business?