Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Bases on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.
a. What is the product cost for the expansion product under absorption and variable costing?
b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?
c. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?
d. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?
| ABC's Product information |
|
|
|
Current Product |
Expansion Product (estimate) |
| Selling Price |
$14.50 |
? |
| Units produced and expected to be sold |
80,000 |
5,000 |
| Machine Hours |
40,000 |
5,000 |
| Direct Materials |
$1.30 per unit |
$5.60 per unit |
| Direct labor dollars needed per product |
$2.80 per unit |
$4.00 per unit |
| Variable Factory Overhead |
$1.00 per Machine Hour |
$1.00 per Machine Hour |
| Variable Selling Expense |
$0.20 per unit |
$0.20 per unit |
|
|
|
|
|
|
| Total Fixed Costs: |
|
|
| Fixed Factory Overhead |
$ 198,000 |
|
| Fixed Selling expenses |
$ 191,250 |
|
|
|