Common Costs and the Death Spiral Blaine Avenue Company manufactures three products. Gross margin computations for these three products for 2006 are as follows:
Product X Product Y Product Z
Sales $800,000 $700,000 $600,000
Direct Materials 50,000 150,000 200,000
Direct Labor 50,000 200,000 250,000
Manufacturing Overhead 80,000 320,000 400,000
Gross Margin $620,000 $30,000 $250,000
Blain Avenue has re examined the activities that relate to its manufacturing overhead costs and has discovered that $500,000 of the annual amount of manufacturing overhead is directly related to the number of product batches produced during the year. The number of batches of three products for 2006 was as follows: Product X, 100 batches; Product Y 100 batches; product z 40 batches. The remaining $300,000 in overhead is for facility support (property taxes, security costs, general administration, etc.) and does not vary at all with the level of activity.
1. Prepare gross margin calculations for Blaine Avenue’s three products assuming that manufacturing overhead is allocated based on the number of batches. Also, show a "total" column. Facility support costs are not to be allocated to any of the products, but are to be subtracted in the "total" column in the computation of total company operating profit
2. Using the gross margin numbers prepared under the direct labor cost method of manufacturing overhead allocation, Blaine avenues board of directors has tentatively decided to discontinue the z product line. Assume that this was done at the beginning of 2006. What would have happened to total company operating profit for the year? Explain
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