Multiple allocation bases.' : R efer to Case 46.

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

Jean 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 per unit, Krispy Krackle requires seven hours per unit, and Creamy Crunch requires six hours per unit. Additionally, Jean notices that the $15,000 per month spent to rent 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 4.000 square feet, and Creamy Crunch 5,000 square feet. Jean decides to incorporate this into the allocation base for the rental costs.

Since labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500.

CBI still plans to produce 1,000 cases each of Almond Dream, Krispy Krackle, and Creamy Crunch. Assume that CBI can sell all the 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.

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 criterion of d ropping products with less than 10 percent gross profit margin?

c. Based on the recommendation you make in requirement (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, substantiate the profitability of remaining products.