You have recently been hired as the controller for Sit-Anywhere, a manufacturer of benches used in public parks. The company produces three models with their customizable stainless-steel benches being their fastest growing product. While the company is moderately profitable, its overhead has been growing faster than its sales which has you concerned.

The company prices all three products at a 50% margin and has historically allocated fixed costs based on direct labor hours. The figures produced for the last quarter by the previous controller are as follows:

Based on preliminary discussions you have had with managers in the company, you find that half of the $1,200,000 in overhead is related to the engineering department. Of this $600,000, two-thirds can be attributed to the custom stainless products due to all the engineering work that is required for each sale. The remaining one-third of the engineering costs are split evenly between the standard wood and standard steel products.

Standard steel=$100,000

2nd half of fixed cost allocation=$600,000

Standard wool= $100,000

Standard steel=$240,000

Custom stainless= $640,000

Assuming the other half of the $1,200,000 in overhead can still be allocated based on direct labor hours, how would this new activity-based allocation change the net income by product line? What potential strategies can you suggest that might improve the results from the companys fastest growing product line?

\begin{tabular}{|c|c|c|c|c|c|c|c|} \hline & & \begin{tabular}{l} tandard \\ Wood \end{tabular} & & \begin{tabular}{c} Standard \\ Steel \end{tabular} & & \begin{tabular}{l} Custom \\ Stainless \end{tabular} & Total \\ \hline Sales & $ & 500,000 & $ & 1,000,000 & $ & 1,000,000 & $2,500,000 \\ \hline Variable Costs & & 250,000 & & 500,000 & & 500,000 & 1,250,000 \\ \hline Cont. Margin & & 250,000 & & 500,000 & & 500,000 & 1,250,000 \\ \hline \multicolumn{8}{|l|}{ Fixed Costs: } \\ \hline DLH & & 10,000 & & 20,000 & & 20,000 & 50,000 \\ \hline Alloc. Fixed Costs & & 240,000 & & 480,000 & & 480,000 & 1,200,000 \\ \hline Net Income & $ & 10,000 & $ & 20,000 & $ & 20,000 & 50,000 \\ \hline \end{tabular}