Discussion:
Multiple Allocation Bases
Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable. She notices that $30,000 of the overhead originated from the equipment used. She decides to incorporate machine-hours into the overhead allocation base to determine the effect on product profitability. Almond Dream requires 2 machine hours per case, Krispy Krackle requires 7 hours per case, and Creamy Crunch requires 6 hours per case. Additionally, Jean notices that the $15,000 per month spent to rent 10,000 square feet of factory space accounts for almost 22 percent of the overhead. The assignment of square feet is 1,000 to Almond Dream, 4,000 to Krispy Krackle, and 5,000 to Creamy Crunch. Jean decides to incorporate this into the allocation base for the rental costs.
Because labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500.
CBI still plans to produce 1,000 cases each of Almond Dream, Krispy Krackle, and Creamy Crunch. Assume that CBI can sell all products it manufactures and that if it drops any products, it will use excess capacity to produce additional cases of the most profitable product. Overhead will remain $69,500 per month under all alternatives.
Required
a. Based on the additional data, determine the product cost and gross profit t margin percentages of each product using the three allocation bases (labor-hours, machine-hours, and square feet)to determine the allocation assigned to each product.
b. Would management recommend dropping any product based on the criterion of dropping products with less than 10 percent gross profit t margin?
c. Based on the recommendation you make in requirement ( b ), recalculate the allocations and profit t margins to determine whether any of the remaining products should be dropped from the product line. If so, substantiate the profitability of remaining products.