You have two product lines, Basic and Premium. You currently sell 700 units of Basic at a price of $25/unit, and 350 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 $17,500.
Required:
a) allocate the shared fixed costs ($17,500) 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 350 units of Basic, 700 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) _________________