Question

# Cost allocation Product A Product B Total sales volume (units) 360 200 560 Revenue \$4,000 \$24,000...

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=\$ ____________

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

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

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

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