Executive summary and statement of the problem
CCI implements different approaches to get 40% mark on for its four different products. During first cycle product A could not get minimum 25% mark up and due to that it became discontinue. After first cycle, CCI will charge $43 for product B, $78.498 for product C and $50 for product D. When it continues the same approach, product C's Mark up level is 6.12% which is less that 25% mark up level policy so CCI will discontinue production of C and increase production of B. Total allocated cost is $75000 and total labor hour are 5000 so allocation rate per hour will be $15. CCI will charge $77 for product B, $63for ...view middle of the document...
If CCI kept its cost system but differentiated between variable and fixed cost and decided to maximize contribution then the variable cost will be $60, $17.5, $30 and $22.5 for products A, B, C and D respectively. CCI will be able to get more than 25% mark up for all the products by using this approach and mark up are 63.33%, 120%, 98.33% and 117.78% for products A,B,C and D respectively. For this approach the total fixed cost will be 45000 and total labor hour will be 12000 so allocation rate is $3.75. The mark up will be 18.79%, 81.18%, 44.24% and 63.33% for product A, B, C and D. Here Product A will be discontinued according to 25% mark up policy. Production of B is increased and the new allocation rate per hour will be $6.43 and the mark up is 26.81%, 20.71% and 38.57% for the products B, C and D respectively.
If the firm modified its cost system so that it contained two cost pools, one containing the overhead costs associated with Products A and B and the overhead costs associated with Products C and D, and then allocated these overhead pools on the basis of direct labor hours, the allocation rate per hour for cost pool associated with products A and B is $6.07 and cost pool associated with product C and D are $7.5. It can get mark up of 25.26% and 63.33% for product A and B and for product C and D it is 20.35% and 139.56%. As per 25% mark up policy product A will be discontinued and more units of product B are produced. Overhead pool allocation is also proved not efficient as existing cost system, this will reduce product diversity of CCI too.