Jean Sharpe

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a. To determine the allocation rate for each base in order to allocate overhead utilizing the new allocation bases, the following formulas must be used: Machine-hours: Allocation rate is $30,000 / (2 + 7 + 6) machine-hours per case = $2,000 per machine- hour. Square feet: Allocation rate is $15,000 / (1,000 + 4,000 + 5,000) square feet = $1.50 per square foot. Labor-hours: Allocation rate is $24,500 / (1,000 + 1,000 + 1,000) labor-hours per case = $8.17 per labor- hour. With the help of the allocation rates, we are able to distribute the overhead costs among the products in the following manner: Product Almond Dream Krispy Krackle Creamy Crunch Total Machine-hours $4,000 $14,000 $12,000 $30,000 Square feet $1,500 $6,000 $7,500 $15,000 Labor-hours $4,085.67 $8,170.33 $12,244.00 $24,500 Total overhead $9,586.67 $28,170.33 $31,744.00 $69,500 In order to determine the cost of the product on a case-by-case basis, we first add the overhead costs to the direct labor as well as direct material costs: Product Almond Dream Krispy Krackle Creamy Crunch Direct materials $10.00 $11.00 $12.00 Direct labor (2 hours x $14 per hour) $28.00 $98.00 $84.00 Machine-hours ($2,000 per hour x hours per case) $4,000 $14,000 $12,000 Square feet ($1.50 per square foot x square feet per case) $1.50 $6.00 $7.50 Labor-hours ($8.17 per labor-hour x labor-hours per case) $4.09 $8.17 $12.24 Total cost per case $47.59 $137.17 $128.74 To determine the percentage of gross profit that a business generates, we take the selling price per case, deduct the cost of the product per case, and then divide the result by the selling price per case.
Product Almond Dream Krispy Krackle Creamy Crunch Selling price per case $60.00 $170.00 $160.00 Product cost per case $47.59 $137.17 $128.74 Gross profit per case $12.41 $32.83 $31.26 Gross profit margin percentage 20.68% 19.31% 19.54% b. To determine whether management would recommend dropping any product based on the criterion of dropping products with less than 10 percent gross profit margin, we need to compare the gross profit margin percentage for each product to 10 percent: Product Almond Dream Krispy Krackle Creamy Crunch Gross profit margin percentage 20.68% 19.31% 19.54% Recommendation Keep Keep Keep Based on this criterion, management would not recommend dropping any product. c. Since management would not recommend dropping any product, there is no need to recalculate the allocations and profit margins. Reference Lanen, W. (2010). Fundamentals of cost accounting . McGraw-Hill Education.
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