In September 2005, Apple Computers unveiled a new version of smaller, sleeker iPods (i.e., digital music players). The new iPod-Nano holds up to 1,000 songs (4-GB) and works with Macs and PCs. The Nano has a color display and is available at conventional retailers in the United States for $249.
Apple also offers a 20-GB, standard iPod for $299. Many potential customers have said they were disappointed that the Nano cost only $50 less than the standard iPod which has more than five times the storage capacity. Nonetheless, the media hype for the Nano has already exceeded expectations.
A new division of Apple will manufacture only the Nano (4-GB) and the Standard (20-GB) iPods. The critical part of the manufacturing process uses a single machine that produces the color displays on both types of iPods. Traditionally Apple has made production and marketing decisions based on product profitability. The planned annual financials for each product are presented in the table below.
Currently, Apple allocates variable overhead expenses based on direct materials cost and allocates fixed overhead expenses based on direct labor cost. Using this allocation system, what is the cost of producing the iPod-Nano and the iPod-Standard? What is the profitability of each product?