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.

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?

Standard Standard Custom Wood Steel Stainless Total $ 500,000 $ 1,000,000 $ 1,000,000 $ 2,500,000 250,000 500,000 500,000 1,250,000 250,000 500,000 500,000 1,250,000 Sales Variable Costs Cont. Margin Fixed Costs: DLH Alloc. Fixed Costs Net Income 10,000 240,000 10,000 $ 20,000 480,000 20,000 $ 20,000 480,000 20,000 $ 50,000 1,200,000 50,000 $