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Cost Allocation Table and Cover Memo

You are the Division Manager for personal computers at Technology Unlimited. As the Division Manager, you are responsible for deciding which PC's to manufacture. Currently your division manufactures three different models of personal computers:

1. Your Entry Level PC is losing money. Sales are $200,000 on 20,000 units. Variable costs are $100,000 and fixed costs are $110,000, for an overall loss of $10,000.
2. The Standard PC is making money. Sales are $450,000 on 30,000 units, with variable costs of $270,000 and fixed costs of $165,000 for an overall profit of $15,000.
3. The Deluxe PC is making the big bucks for the division. Sales are $1,000,000 on 50,000 units, with variable costs of 600,000 and fixed costs of 275,000 for an overall profit of $125,000.

The president of the company is Nancy Williams. She suggests dropping the Entry Level model and concentrating on the two other models. You reply that this would lead to a cost allocation death spiral. She says, "Prove it, or drop the Entry Level model".

Analyze the information and prepare a briefing to Nancy. What will be the effect on the Standard and Deluxe models if you drop the Entry Level model? How strongly should argue for or against the Entry Level PC based on your financial analysis as well as opposition to the model by the president of the company?

Deliverable 1 - Cost Allocation

Create a table for the financial information if the three product lines are continued with no changes.

Then, create a second table to show what happens if the Entry Level PC is dropped. If either the Standard of Deluxe models then show a loss as a result of dropping the Entry Level model, then create a third table showing the result of dropping any other unprofitable models.

(see attachment for data)

Deliverable 2 - Cover Memo & Background Info

Create a cover memo for your president that summarizes the financial information in the table. Decide how strongly you want to argue in favor or against the Entry Level PC and make your case.

Attachments

Solution Preview

Please find the edited deliverables spreadsheet attached. Here is an example of the memo you might write with your findings:

To: Nancy Williams, President
From: [you]
Date: 6/7/2007
Re: Cost Allocation Distortion

I am writing to you in regards to our recent discussion about dropping the Entry Level PC in order to improve our overall profitability.

As you can see from the attached spreadsheet which I have prepared, although our Entry Level PC resulted in an unacceptable profit loss of $10,000, dropping that particular product line would reduce our overall profitability from $130,000 to ...

Solution Summary

Cost allocation spreadsheet and memo for Technology Unlimited.

$2.19