Dawson Company manufactures three types of computer games: Skyhawk, Seahawk, and Sharks. It allocates overhead to the games based on the number of direct labor hours worked on each product. The results of the most recent period follow:
|
|
Skyhawk
|
Seahawk
|
Sharks
|
|
Units produced and sold
|
9,000
|
8,000
|
7,000
|
|
Selling Price
|
$45.00
|
$30.00
|
$25.00
|
|
Less:
|
|
|
|
|
Direct materials per unit
|
5.50
|
4.25
|
3.00
|
|
Direct labor cost per unit
|
9.00
|
2.00
|
3.00
|
|
Manufacturing overhead per unit
|
27.00
|
6.00
|
9.00
|
|
Gross Margin
|
3.50
|
17.75
|
10.00
|
|
Less:
|
|
|
|
|
Selling cost per unit
|
2.25
|
1.50
|
1.25
|
|
Administration cost per unit
|
3.75
|
3.00
|
2.75
|
|
Net Income (loss) per unit
|
$(2.50)
|
$13.25
|
$6.00
|
The manager of Dawson Company is concerned that the Skyhawk game seems to be a net loser and he is considering whether to discontinue it. He has asked you to analyze the situation and make a recommendation. Your analysis reveals that Dawson Company has three levels of overhead - faculty sustaining, batch-related, and unit-related - and that the appropriate overhead rates are $6.00 per square foot, $1,000 per production run, and $4 per unit, respectively. Resource usage during the past period follows. In addition, you discover that administrative costs are fixed while selling costs are variable per unit.
|
|
Skyhawk
|
Seahawk
|
Sharks
|
|
Square feet occupied
|
10,000
|
12,500
|
15,000
|
|
Production runs
|
9
|
12
|
12
|
Required:
A. Determine whether Dawson Company should drop any game.
B. Write a memo to the manager with your recommendation.