Despite the fact that, based on the 25% mark-on, product A was the first to be dropped, the item maintains the highest contribution rate due to its increased retail price.
4.
If the company wants to trace all variable costs to its product accurately, the allocation methodology that uses labor hours could be used. This type of estimate will come up with a dollar rate per labor hour and then the average variable cost per unit can be evaluated, depending on the number of labor hours used to manufacture the product. In this case, for example, for each of the products A through D. there is a certain number of hours that is used to manufacture the product (6, 1, 3 and 2 respectively). The overhead cost per hour is calculated by dividing the variable overhead by the total number of hours. The variable cost per unit according to this method is calculated by multiplying this constant by the total number of hours per product to arrive at a variable cost per unit.
Using the same methodology to calculate the fixed overhead per unit would significantly lower this, since the variable cost has been calculated in the method previously presented. With this, there is only a $3.75 per unit, significantly lower than previously. With the new method, the final results show that all four products will be profitable. According to the new methodology, there are several conclusions worth mentioning: (1) the mark on is closer to a 20-25% value rather than previously and (2) two products that were formerly very profitable are now below the 25% threshold (products B. And D).
5. According to the calculations in the Excel (last lines), dividing the costs...
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