Problem:
Managers often make decisions about keeping or dropping a product after evaluating the probability of each product in the product line. Bimini Products Inc., recently completed an activity-based costing study. Management wished to compare the results with the cost data produced by their traditional cost system. Product data are as follows:
Product Selling Product Cost Traditional Cost ABC
A $100 $80 $65
B 150 120 140
C 130 80 90
Product A is produced is high volume using a stable process that does not require excessive support activities. Product B demands high levels of support activities and is produced in low volume. Product C is produced in moderate volume.
A. For each product compute:
1. Profit margin, traditional
2. Profit margin, ABC
3. Percentage change in profit margin as follows: (profit margin ABC - profit margin / profit margin traditional).
B. What kinds of product line decisions might your calculations support?