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

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

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

	Product A	Product B	Total
sales volume (units)	250	500	750
Revenue	$20,000	$100,000	$120,000
Variable costs:
direct materials	$4,000	$20,000	$24,000
direct labor	$10,000	$40,000	$50,000
Contribution margin	$6,000	$40,000	$46,000
Fixed costs			$39,000
Profit			$7,000

Generic Motors uses ABC to allocate the fixed costs. It examined the main activities in the firm, and decided to break up the total
fixed costs of $39,000 into 3 cost pools:
* “labor-related” – the total cost in this pool is $10,000, allocated based on direct labor dollars
* “sales-related” – the total cost in this pool is $9,000, allocated based on number of units
* “production setups” – the total cost in this pool is $20,000, allocated based on the number of production batches.
A is produced in batches of 10 units, and B is produced in batches of 5 units.

Required:

a) for each cost pool, compute the allocation rate and the amounts allocated to product A and product B. (assume that practical capacity = total activity
volume for each pool)
(hint: The amounts allocated to A and B from each pool should add up to the total cost in that pool. To allocate the costs in the “production setups” pool,
you will have to compute the number of batches. If the total number of batches for A and B does not add up to 125, 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 the profit 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 = $ ___________

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