A firm produces product A. the firm's two major overhead costs are indirect personnel wages and equipment
deprecation. Product A is responsible for 14% of indirect wages and personnel overhead and 22.5% of
equipment depreciation costs. Indirect personnel wages cost the firm $100,000 per year, while deprecation
costs $200,000 per year. The prodcut margins are currently 35%.
Orgininal number of untis sold: 10,000
Orginal sales price: $90
The firm can increase its sales to 20,000 units of product A, and lower the price to 80$ per unity with direct
material costs of $12.50 and direct labor costs fo $40.
What will be the effect on gross profit margins under an activity-based cost stytem?
Margins will fall 4.375%
Margins will rise 8.125%
Mrgins will rise 4.375%
Margins will fall 8.125%