# 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:

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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