ment Scoring st submission is used for your score. .6/10 Points] DETAILS PREVIOUS ANSWERS NOTES ASK YOUR TEACHER PRACTICE ANOTHER Question 1: Cost allocation Product A Product B Total sales volume (units) 270 150 420 Revenue $1,500 $9,000 $10,500 Variable costs: direct materials $300 $600 $900 direct labor $600 $1,500 $2,100 Contribution margin $600 $6,900 $7,500 Fixed costs $6,300 Profit $1,200 per DLS a) Allocate the fixed costs between products A and B. Use direct labor dollars as the cost driver. allocation rates allocated costs for A=$1 allocated costs for Bus b) Compute the profit margins for products A and B: profit margin for A=$ profit margin for B=$ Enter negative numbers with a minus sign, i.e., a loss of $1,000 should be entered as-1000, not as (1000) or ($1000). c) Should you drop product A or product B in the short 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 product B Should you drop product A or product B in the long term? Why? Keep both products -- both have positive contribution margin Drop product A -- it has negative profit margin d) If you drop product A in the short term, fixed costs will: remain the same decrease by $1,800 profit will: decrease by $600 Oincrease by $1,200 If you drop product A in the long term, fixed costs will: Oremain the same decrease by $1,800 profit will: Odecrease by $600 increase by $1,200 e) Allocate the fixed costs between products A and B, using the number of units as the cost driver. allocation rates per unit allocated costs for A=$ allocated costs for B-$ 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 (a) -- direct labor is always a better cost driver than the number of units use the allocated costs from (e) -- the number of units is always a better cost driver than direct labor it 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 f) Suppose that a firm uses a labor-intensive production process. The most reasonable cost driver for manufacturing overhead costs is: O number of units O 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 direct labor (measured in hours or dollars) g) Suppose that a firm uses a machine intensive process to make the components for the finished product and then uses a labor intensive process to assemble the finished product. The firm wants to implement a refined cost allocation with two cost pools: Pool 1: overhead costs related to the production of components (e.g., machine depreciation, rent for the factory building e) Allocate the fixed costs between products A and B, using the number of units as the cost driver. allocation rates per unit allocated costs for A-$ allocated costs for B=$ 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? o use the allocated costs from (a) -- direct labor is always a better cost driver than the number of units use the allocated costs from (e) -- the number of units is always a better cost driver than direct labor it 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 ) Suppose that a firm uses a labor-intensive production process. The most reasonable cost driver for manufacturing overhead costs is: O number of units O 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 direct labor (measured in hours or dollars) 9) Suppose that a firm uses a machine-intensive process to make the components for the finished product and then uses a labor-intensive process to assemble the finished product. The firm wants to implement a refined cost allocation with two cost pools: Pool 1: overhead costs related to the production of components (0.9., machine depreciation, rent for the factory building used to make the components, salaries of machine maintenance staff) Pool 2: overhead costs related to the assembly of the finished product (e.9., depreciation on tools used by assembly workers, rent for the factory building used for assembly, salaries of labor supervisors) The most reasonable cost drivers for the two pools are: O number of units for pool 1 and number of workers for pool 2 O direct labor hours or dollars for both pools machine-hours for pool 1 and direct labor hours or dollars for pool 2 O machine hours for both pools
