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# You have two product lines, Basic and Premium You currently sell 50

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You have two product lines, Basic and Premium. You
currently sell 500 units of Basic at a price of \$25/unit, and
250 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
Required:
a) allocate the shared fixed costs (\$12,500) 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 250 units of Basic, 500 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\$

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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) _____
Solution
a) Calculation of shared fixed costs using direct labor
dollars as the allocation basis Basic Premium Units
(A) 500 250 Direct labor Cost per unit (B)
\$ 5.00
\$ 15.00 Total Labor Cost (C)
=A*B \$ 2,500.00
\$ 3,750.00 Allocated Fixed Cost
(Total) \$ 5,000.00
\$ 7,500.00 Total Fixed Cost
=\$12500 12500 *2500 / (2500+3750) 12500 *3750 /
(2500+3750) b) Calculation of the profit margin
Basic Premium Selling Price Per unit (A)
\$ 25.00
\$ 50.00 Direct Material Cost

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You have two product lines, Basic and Premium. You currently sell 500 units of Basic at a price of \$25/unit, and 250 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 \$12,500. Required: a) allocate the shared fixed costs (\$12,500) 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 al ...
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