Harvard business case Camelback Communications 1. What will CCI now have to char

Question

Harvard business case Camelback Communications

1.   What will CCI now have to charge for each product to make a 40% mark-on?

If CCI 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 per hour for the new product mix. Repeat Question 1.
3.   What is going on?
4.   What would happen if the firm kept its existing cost system but differentiated between variable and fixed cost and decided to maximize contribution?
5.   What would happen if the firm modified its cost system so that all variable costs were traced to the product accurately but fixed costs were allocated using the existing system?
6.   What would happen 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 other the overhead costs associated with Products C and D, and then allocated these overhead pools on the basis of direct labor hours?

Explanation / Answer

Answer:

hours required 6 1 3 2 A B C D Material      15 5 10 5 Labor      30 5 15 10 Variable OH      15 7.5 5 7.5 Unit var. cost     60 17.5 30 22.5 fixed overhead 22.5 3.75 11.25 7.5 45000/12000 *3.75 Total cost 82.5 21.25 41.25 30 Existing unit cost 85 16.67 45 28.33 less total unit cost 82.5 21.25 41.25 30 Profit per unit 2.5 -4.58 3.75 -1.67 0 The product A and C are showing more profit while B and D is showing more loss in the changed system than used be company earlier. However no impact on overall profitability of the company. Earlier the products with high labor hours were allocated higher unit cost than existing proposed system, as in the proposed system only the fixed cost is affected while variable cost are being charged on actual basis. 2 hours required 6 1 3 2 A B C D Material      15 5 10 5 Labor      30 5 15 10 Applied 36.43 6.07 22.5 15 Total cost 81.43 16.07 47.5 30 A & B C & D Total variable overhead 22500 12500 35000 Fixed overhead 20000 25000 45000 total 42500 37500 80000 direct labor hours 7000 5000 12000 FOH rate 6.071429 7.5 Existing unit cost 85 16.67 45 28.33 less total unit cost 81.43 16.07 47.50 30.00 Profit per unit 3.57 0.60 -2.5 -1.67 0 The profitability has been shifted on pool basis, the pool A is showing profit while pool B is showing loss however overall profitability is once again the same. It seem better than discussed in 1 as the pool with high labor hours which is A has the overhead application rate less than the pool B which has fewer labor hours. However the most appropriate is the ABC costing if the cost detail and related drivers of fixed cost is available

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