Question
The Acme Corporation manufactures a number of different kinds of sprinklers in three broad product lines. The following table provides relevant information about the product
The Acme Corporation manufactures a number of different kinds of sprinklers in three broad product lines. The following table provides relevant information about the product lines.
Hand-Held | Lawn Sprinklers | Estate Sprinklers | |
Units | 1,000,000 | 2,000,000 | 40,000 |
Price per unit | $9.00 | $8.50 | $15.00 |
Variable costs per unit | 2.00 | 4.00 | 4.50 |
Labor hours per unit | 2.2 hours | 1.9 hours | 2.1 hours |
Batch size | 10,000 units | 5,000 units | 1,000 units |
Currently, Acme incurs total overhead of $12,776,400 per year and allocates it to individual products using labor hours as the allocation basis. What is each product's profit margin (in total dollars and per unit) under the current method for allocating overhead costs?
Hint: Calculate an overhead rate per direct labor hour and use this rate to compute overhead charges to the three products. Compute profitability of each model.
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