# question 2 cost allocation evaluating changes in the product mix in the long term 461357

You have two product lines, Basic and Premium. You currently sell 700 units of Basic at a price of \$25/unit, and 350 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 \$17,500.

Required:

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a) allocate the shared fixed costs (\$17,500) 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 350 units of Basic, 700 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\$

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) _________________

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