Question 2 (cost allocation, evaluating changes in the product mix in the long term) You have two product lines, Basic and Premium. You currently sell 800 units of Basic at a price of $25/unit, and 400 units of Premium at a price of $50/unit. Basic requires $2.5 of direct materials per unit and $5 of direct labor per unit. Premium requires $5 of direct materials per unit and $15 of direct labor per unit. There is no variable overhead, for simplicity. The total fixed costs (shared by Basic and Premium) are $20,000. Required: a) allocate the shared fixed costs ($20,000) among Basic and Premium, using direct labor dollars as the allocation basis (hint: notice that the direct labor numbers above are per unit. To do the allocation, you will have to compute the total amounts of direct labor $ used by each product line). allocation rate = per DL$ FC allocated to Basic = (total, not per unit) FC allocated to Premium = (total, not per unit) b) using the allocated costs from (a), compute the profit margin for each product line. profit margin for Basic = profit margin for Premium = Additional information for c)-d) below: You are thinking of changing the product mix to 400 units of Basic, 800 units of Premium. This is a long-term change. c) Estimate the fixed costs (capacity costs) for the new product mix. Use direct labor $ as the allocation basis. (hint: Compute the allocation rate using the original product mix. After that, multiply by the new amounts of the cost driver.) allocation rate = per DL$ FC allocated to Basic = FC allocated to Premium = d) Compute the profit margin for Basic and Premium for the new product mix. profit margin for Basic = profit margin for Premium = Is it a good idea to change the product mix? (enter 1=yes, 2=no) 11