Question
Potter Company manufactures two models of exercise bikes the ST100 and the EX500. The current cost accounting system allocates manufacturing support costs to the two
Potter Company manufactures two models of exercise bikes the ST100 and the EX500. The current cost accounting system allocates manufacturing support costs to the two products on the basis of direct labor hours. For 2016, the company has estimated that it will incur $1,017,000 in manufacturing support costs, work 60,000 direct labor hours, and produce 10,000 units of the EX500 model and 40,000 units of the ST100 model. The EX500 model requires two hours of direct labor to assemble and the ST100 requires one hour of direct labor to assemble. Material and labor costs per unit and the selling price per unit are as follows:
ST100 EX500
Direct material $32 $45
Direct Labor 10 20
Selling Price 90 150
The company recently implemented an incentive of $10 for every EX500 unit sold. What is your evaluation of the desirability of this new incentive?
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