Mr. Smith used the following information to calculate the profit coefficients fo

Question

Mr. Smith used the following information to calculate the profit coefficients for Aqua-Spas and Hydro-Luxes: pumps cost $225 each, labor costs $12 per hour, tubing costs $2 per foot. In addition to pumps, labor, and tubing, the production of Aqua-Spas and Hydro-Luxes consumes, respectively, $243 and $246 per unit in other recourses that are not in short supply. Using this information, Mr. Smith calculated the marginal profits of Aqua-Spas and Hydro-Luxes as: Aqua-Spas Hydro-Luxes Selling Price $950 $875 Pump Cost -$225 -$225 Labor Cost -$108 -$72 Tubing Cost -$24 -$32 Other Variable Costs -$243 -$246 Marginal Profit $350 $300 Howie's accoutant reviewed these calculations and thinks Howie made a mistake. For accounting purposes, factory overhead is assigned to products at a rate of $16 per labor hour. Howie's accountant argues that because Aqua-Spas require nine labor hours, the profit margin on this product should be $144 less. Similarly, because Hydro-Luxes require six labor hours, the profit margin on this product should be $96 less. Who is right and why? ***It might be easier to use excel for this problem.

Explanation / Answer

Mr. Smith calculated the marginal profits of Aqua-Spas and Hydro-Luxes as: Aqua-Spas Hydro-Luxes Selling Price $950 $875 Pump Cost -$225 -$225 Labor Cost -$108 -$72 Tubing Cost -$24 -$32 Other Variable Costs -$243 -$246 Marginal Profit $350 $300 Incurred labor hours for aqua-spas = 108/12 = 9 hours for hydro-luxes = 72/12 = 6 hours Accounting purposes, cost for aqua-spas = 16* 9 = $144 for hydro-luxes = $16* 6 = $96 So change in marginal profit for aqua-spas = 144 - 108= $32 decrease for hydro-luxes = 96 - 72 = $24 decrease

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