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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
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 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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Anonymous
Very useful material for studying!

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