ACCT 2102 Chapter Notes - Chapter 9: Cost Driver, Profit Margin, Contribution Margin

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blushcricket309

2 May 2016

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Capacity costs are controllable in the long term: aka fixed costs, ex. adding/removing machines, hiring/firing workers. In the long-term, we focus on maximizing the profit margin, not the contribution margin. Profit margin (for a given product line) = = contribution margin allocated capacity costs aka fixed costs. = (revenue variable cost) allocated capacity costs aka fixed costs: to evaluate long-term decisions, need to estimate the change in capacity costs => use cost allocation to do that. Cant be traced to individual product lines. A large fraction of total costs: want to know: How to divide them among the two product lines. How they will change with decisions in the long term. % capacity costs used by each product line is roughly proportional to its % use of the cost driver in the long term, capacity costs change roughly in proportion to changes in the cost driver amounts.

Related Questions

Question 1 (cost allocation, product profitmargin, killing products in the long term)

Use the following contribution margin statement:

	Product A	Product B	Total
sales volume (units)	100	180	280
Revenue	$40,000	$240,000	$280,000
Variable costs:
direct materials	$8,000	$16,000	$24,000
direct labor	$16,000	$40,000	$56,000
Contribution margin	$16,000	$184,000	$200,000
Fixed costs			$168,000
Profit			$32,000

Required:

(a) allocate the shared fixed costs ($168,000) among product A andproduct B, using direct labor dollars as the allocationbasis.
allocation rate=$ ______ per DL$
FC allocated to A=$ _______
FC allocated to B=$ _______

(b) using the allocated costs from (a), compute the profit marginfor product A and product B.
If you get a negative number, enter it with a minus sign, i.e.,enter negative $1000 as -1000, not as ($1000)
profit margin for A=$ _______
profit margin for B=$ _______

c) based on the profit margins from (b), should you kill product Aor product B in the long term? Explain your decision.________________________________________________________________________________

d) allocate the shared fixed costs ($168,000) among product Aand product B, using the number of units as the allocationbasis.

allocation rate=$ _______ per unit
FC allocated to A=$ _______
FC allocated to B=$ ______

brownpanda976

You have two product lines, Basic and Premium. You currentlysell 500 units of Basic at a price of $25/unit, and 250 units ofPremium at a price of $50/unit. Basic requires $2.5 of directmaterials per unit and $5 of direct labor per unit. Premiumrequires $5 of direct materials per unit and $15 of direct laborper unit. There is no variable overhead, for simplicity. The totalfixed costs (shared by Basic and Premium) are $12,500.

Required:

a) allocate the shared fixed costs ($12,500) among Basic andPremium, using direct labor dollars as the allocation basis (hint:notice that the direct labor numbers above are per unit. To do theallocation, you will have to compute the total amounts of directlabor $ used by each product line).
allocation rate = $ _____ per DL$
FC allocated to Basic = $ _____ (total, not per unit)
FC allocated to Premium = $ _____ (total, not per unit)

b) using the allocated costs from (a), compute the profit marginfor each product line.
profit margin for Basic = $ _____
profit margin for Premium = $ _____

Additional information for c)-d) below: You are thinking ofchanging the product mix to 250 units of Basic, 500 units ofPremium. This is a long-term change.

c) Estimate the fixed costs (capacity costs) for the new productmix. Use direct labor $ as the allocation basis.
(hint: Compute the allocation rate using the original product mix.After that, multiply by the new amounts of the cost driver.)
allocation rate = $ _____ per DL$
FC allocated to Basic = $ _____
FC allocated to Premium = $ _____

d) Compute the profit margin for Basic and Premium for the newproduct mix.
profit margin for Basic = $ _____
profit margin for Premium = $ _____
Is it a good idea to change the product mix? (enter 1=yes, 2=no)_____

skytoad901

Question 1: (allocating costs using ABC,product profit margin)

Generic Motors Corporation has two product lines, A and B. Itscontribution margin statement for last year is as follows:

	Product A	Product B	Total
sales volume (units)	150	300	450
Revenue	$6,000	$30,000	$36,000
Variable costs:
direct materials	$1,200	$6,000	$7,200
direct labor	$3,000	$12,000	$15,000
Contribution margin	$1,800	$12,000	$13,800
Fixed costs			$11,700
Profit			$2,100

Generic Motors uses ABC to allocate the fixed costs. It examinedthe main activities in the firm, and decided to break up the totalfixed costs of $11,700 into 3 cost pools:
* "labor-related" - the total cost in this pool is $3,000,allocated based on direct labor dollars
* "sales-related" - the total cost in this pool is $2,700,allocated based on number of units
* "production setups" - the total cost in this pool is $6,000,allocated based on the number of production batches. A is producedin batches of 10 units, and B is produced in batches of 5units.

Required:

a) for each cost pool, compute the allocation rateand the amounts allocated to product A and product B. (assume thatpractical capacity = total activity volume for each pool)
(hint: The amounts allocated to A and B from each pool shouldadd up to the total cost in that pool. To allocate the costs in the"production setups" pool, you will have to compute the number ofbatches. If the total number of batches for A and B does not add upto 75, you are doing something wrong).
* "labor-related" pool:
allocation rate = $ ______ per DL$
FC allocated to A = $ ______
FC allocated to B = $ ______
* "sales-related" pool:
allocation rate = $ ______ per unit
FC allocated to A = $ ______
FC allocated to B = $ ______
* "production setups" pool:
allocation rate = $ ______ per batch
FC allocated to A = $ ______
FC allocated to B = $ ______

b) using the allocated costs from (a), compute theprofit margin for product A and product B.
If you get a negative number, enter it with a minus sign, i.e.,enter negative $100 as -100, not ($100)
profit margin for A = $ ______
profit margin for B = $ ______

plumsnake962

ACCT 2102 Chapter Notes - Chapter 9: Cost Driver, Profit Margin, Contribution Margin

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