Question 1

Kiddo Corporation makes toys of two varieties, Standard (25,000 units sold) and Premium (6000 units sold). The 'Standard' variety is a high-volume product, while the 'Premium' variety is customized for the cities it is sold in. Currently the company applies the absorption costing system to account for overheads and there is ongoing debate within the organization about the effectiveness of the same. Under the current absorption costing system the fixed overheads are absorbed based on direct labor hours.

The production manager is of the opinion that the 'Standard' variety is a loss-making product and should be discontinued, diverting all the resources to the production of the 'Premium' variety. The costing manager disagrees, as he believes that the absorption costing system conceals the profitability of the 'Standard' variety and besides the 'Premium' variety has a considerably smaller market.

The production details to produce each unit of 'Standard' and 'Premium' are

Standard Premium Direct Material (Input) Cost per unit $5 $75 Direct Labor Hours Cost per unit $7 $21Details about the activities are listed below Standard Premium Units Sold 25000 6000 Units produced per setup 250 20 Units per package 25 1 Units per delivery 250 15 Selling Price per unit 100 250