Overhead Allocation Using Different Cost Pools

1. If Premier maintains its rule about dropping products with a mark-on below 25%, which additional products, if any, will it drop?
2. If you decide to drop additional product(s), recalculate the allocation rate for the new product mix. Keep repeating Question 1 until you reach a conclusion. What is that conclusion? Is there a pattern emerging in the order in which products are being dropped?
3. The firm allocates only variable product costs to each product based on direct labor hours. What is the contribution margin for each product? Which product or products should the company produce if it wants to maximize the contribution margin for all of the products it produces? What would be the impact on profits? How accurate is this method of allocating costs? If Premier stopped producing some products in its product line of tennis rackets, what might happen to the demand for the surviving products?
NOTE: A product's contribution margin is its selling price minus its variable cost per unit.
4. What would happen if the firm modified its costing system so that all variable costs were traced to the product accurately, but fixed costs were allocated using the existing system? Compute the cost for each product using this allocation process. What would be the impact on profits? How accurate is this method of allocating costs?
5. What would happen if the firm modified its costing system so that it contained two cost pools, one containing the overhead costs associated with Products A and B and the other overhead costs associated with Products C and D, and then allocated these overhead pools on the basis of direct labor hours? Compute the cost for each product using this allocation process. What would be the impact on profits? How accurate is this method of allocating costs?
6. Under what conditions would direct labor hours accurately allocate Premier's indirect costs to its four products? What are the characteristics of a cost accounting system that accurately allocates a company's fixed and variable indirect costs to its products?
7. Tom Arnold was hired to find accurate costs and a method of allocating that allows decisions to improve profitability. Compare the profits and accuracy of all cost allocation schemes based on Tom Arnold's initial reason for being hired.
8. Do the company costing systems cause a problem?
9. What is the purpose of a cost allocation system?