1. [-/10 Points] DETAILS Question 1: Cost allocation Product A Product B Total sales volume (units) 180 100 280 Revenue $1,000 $6,000 $7,000 Variable costs: direct materials $200 $400 $600 direct labor $400 $1,000 $1,400 Contribution margin $400 $4,600 $5,000 Fixed costs $4,200 Profit $800 Should you drop product A or product 8 in the long term? Why? Keep both products both have positive contribution margin Drop product A - it has negative profit margin Drop product A - it has negative contribution margin Drop product A - it has smaller contribution margin than products d) If you drop product A in the short term, Fixed costs will remain the same decrease by $1.200 profit will decrease by s400 Increase by $300 per unit If you drop product A in the long term, fixed costs will remain the same decrease by $1,200 X profit will decrease by $400 O increase by $800 36 e) Allocate the fixed costs between products A and B, using the number of units as the cost driver allocation rates allocated costs for AS 2700 allocated costs for B-5 1500 These allocated amounts are very different from what you got in part (a). In general, should we use the allocated costs from part (a) or from part (e)? Why? use the allocated costs from () - direct laboris always a better cost driver than the number of units use the allocated costs fram (e)-the number of units is always a better cost driver than direct labor depends -- direct labor can be a better cost driver in some situations, and the number of units (or some other activity measure) can be a better cost driver in other situations 1) Suppose that a firm uses a labor-intensive production process. The most reasonable cost driver for manufacturing overhead costs is: number of units machine hours direct labor (measured in hours or dollars) Suppose that a firm uses a machine-intensive production process. The most reasonable cost driver for manufacturing overhead costs is: number of units machine hours o Type here to search