Question

Cost allocation

	Product A	Product B	Total
sales volume (units)	360	200	560
Revenue	$4,000	$24,000	$28,000
Variable costs:
direct materials	$800	$1,600	$2,400
direct labor	$1,600	$4,000	$5,600
Contribution margin	$1,600	$18,400	$20,000
Fixed costs			$16,800
Profit			$3,200

a) Allocate the fixed costs between products A and B. Use direct labor dollars as the cost driver.
allocation rate=$  per ___________ DL$
allocated costs for A=$ __________
allocated costs for B=$ ___________

b) Compute the profit margins for products A and B:
profit margin for A=$ ____________
profit margin for B=$ ____________
Enter negative numbers with a minus sign, i.e., a loss of $1,000 should be entered as -1000, not as (1000) or ($1000).

* Knowing That If you drop product A in the short term, fixed costs will remain the same , profit will: decrease by $1,600

* If you drop product A in the long term, fixed costs will decrease by $4,800 , profit will increase by $3,200

c) Allocate the fixed costs between products A and B, using the number of units as the cost driver.
allocation rate=$ ___________ per unit
allocated costs for A=$ ___________
allocated costs for B=$ ____________

Answer 1

Answer to Part a.
Allocation Rate = Total Cost to be allocated / Cost Driver
Allocation Rate = 16,800 / 5,600
Allocation Rate = $3 per DL $

Allocated Cost for Product A = $3 * 1,600
Allocated Cost for Product A = $4,800

Allocated Cost for Product B = $3 * 4,000
Allocated Cost for Product B = $12,000

Answer to Part b.
Profit Margin = Contribution Margin – Fixed Cost

Profit Margin for Product A = $1,600 - $4,800
Profit Margin for Product A = -$3,200

Profit Margin for Product B = $18,400 - $12,000
Profit Margin for Product B = $6,400

Answer to Part c.
Allocation Rate = Total Cost to be allocated / Cost Driver
Allocation Rate = 16,800 / 560 units
Allocation Rate = $30 per Unit

Allocated Cost for Product A = $30 * 360
Allocated Cost for Product A = $10,800

Allocated Cost for Product B = $30 * 200
Allocated Cost for Product B = $6,000