Question

Suppose that next year, all revenues and costs are expected to remain the same except for...

  1. Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $10 000 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
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Answer #1

It does matter which product line requires the new equipment. Because, it's been told that the new equipment is used for one of the product lines.So, this specific fixed cost is readily identifiable and allocatable to a specific product line. Generally, fixed overheads are apportioned over different products using a relevant basis but when specific fixed overheads are unidentifiable for different products. So, in this case, it would be inappropriate to allocate this increased 10,000 with the other fixed costs to other product lines. Therefore, it is needed to know which product line requires the new equipment and allocate the cost only to that product line.

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