# Case Study-AW-Q165

## Case Study-AW-Q165 Online Services

PREMIER PRODUCTS, INC
.

Premier Products, Inc. manufactures tennis rackets. Premier Products has grown extensively over the past two years. While the company has been very profitable, President Mark Harrison is concerned with its ability to cost products accurately. Some products appear to be very profitable while others, which should be showing a profit, seem to be losing money. The production manager is convinced that his production processes are as efficient as any in the industry, and he is unable to explain the apparent high cost of producing some of the products.
Harrison agreed with his production manager and is convinced that the cost accounting system is at fault. He has hired Tom Arnold, a management consultant, to analyze the firm’s costing system. Arnold has documented the existing costing system.

It is a very simple system that uses a single allocation rate for all overhead costs. The overhead rate for the year is determined by adding together the budgeted variable and fixed overhead costs and dividing this sum by the number of budgeted labor hours. The standard cost of a product is found by multiplying the number of direct labor hours required to manufacture that product by the overhead rate and adding this quantity to the direct labor and material costs.
Arnold is convinced that the company’s costing system is partially to blame for some of the firm’s problems. He has assembled data for four of Premier’s products. He has put together the actual costs required for each of these products in Table A.

These costs will serve as the benchmark against which the results of different allocation schemes can be evaluated. Of course, in real life we could never start out with accurate actual costs – accurate actual costs would be the end result that we would attempt to determine. But we provide this information as a learning aid to help you to clearly understand the key issues. Table A is as follows

PRODUCT A B C D
Material \$15.00 \$ 5.00 \$10.00 \$ 5.00
+ Labor 30.00 5.00 15.00 10.00
+Variable OH 15.00 7.50 5.00 7.50
= Unit var. cost \$60.00 \$17.50 \$30.00 \$22.50
Fixed overhead \$10,000 \$10,000 \$12,500 \$12,500
Units produced 1,000 1,000 1,000 1,000
Unit fixed cost \$10.00 \$10.00 \$12.50 \$12.50
Total unit cost \$70.00 \$27.50 \$42.50 \$35.00

You can read more about our case study assignment help services here.

## How it Works

#### How It works ?

Step 1:- Click on Submit your Assignment here or shown in left side corner of every page and fill the quotation form with all the details. In the comment section, please mention Case Id mentioned in end of every Q&A Page. You can also send us your details through our email id support@assignmentconsultancy.com with Case Id in the email body. Case Id is essential to locate your questions so please mentioned that in your email or submit your quotes form comment section.

Step 3:- Once we received your assignments through submit your quotes form or email, we will review the Questions and notify our price through our email id. Kindly ensure that our email id assignmentconsultancy.help@gmail.com and support@assignmentconcultancy.com must not go into your spam folders. We request you to provide your expected budget as it will help us in negotiating with our experts.

Step 4:- Once you agreed with our price, kindly pay by clicking on Pay Now and please ensure that while entering your credit card details for making payment, it must be done correctly and address should be your credit card billing address. You can also request for invoice to our live chat representatives.

Step 5:- Once we received the payment we will notify through our email and will deliver the Q&A solution through mail as per agreed upon deadline.

Step 6:-You can also call us in our phone no. as given in the top of the home page or chat with our customer service representatives by clicking on chat now given in the bottom right corner.

## Case Approach

#### Scientific Methodology

We use best scientific approach to solve case study as recommended and designed by best professors and experts in the World. The approach followed by our experts are given below:

Defining Problem

The first step in solving any case study analysis is to define its problem carefully. In order to do this step, our experts read the case two three times so as to define problem carefully and accurately. This step acts as a base and help in building the structure in next steps.

Structure Definition

The second step is to define structure to solve the case. Different cases has different requirements and so as the structure. Our experts understand this and follow student;s university guidelines to come out with best structure so that student will receive best mark for the same.

Research and Analysis

This is the most important step which actually defines the strength of any case analysis. In order to provide best case analysis, our experts not only refer case materials but also outside materials if required to come out with best analysis for the case.

Conclusion & Recommendations

A weak conclusion or recommendations spoil the entire case analysis. Our expert know this and always provide good chunks of volume for this part so that instructors will see the effort put by students in arriving at solution so as to provide best mark.

## Related Services

The manufacturing processes for these products are structured such that the same labor and equipment can be used to produce products A and B but cannot be used to manufacture products C and D. Similarly, the labor and equipment used to manufacture products C and D cannot be used for A and B.

The company has the capacity to produce

(1) 1,000 units of product A and 1,000 units of product B, or
(2) 2,000 units of product A, or
(3) 2,000 units of product B; or
(4) Any linear combination of products A and B.

The same is true for products C and D. The company has the capacity to produce

(1) 1,000 units of product C and 1,000 units of product D, or
(2) 2,000 units of product C, or
(3) 2,000 units of product D; or
(4) Any linear combination of products C and D.

Product Labor hrs per unit Variable Ohd/unit Number of units Total labor hrs Total var ohd
A 6 \$15.00 1,000 6,000 \$15,000
B 1 7.50 1,000 1,000 7,500
C 3 5.00 1,000 3,000 5,000
D 2 7.50 1,000 2,000 7,500
Total 4,000 12,000 \$35,000

The allocation rate is

Labor hours 12,000
Allocation rate per hour \$6.67

Using this allocation rate, Arnold calculated the standard cost for the four products.

PRODUCT A B C D
Material \$15.00 \$ 5.00 \$10.00 \$ 5.00
+ Labor 30.00 5.00 15.00 10.00
+Allocated cost 40.00 6.67 20.00 13.33
Total unit cost \$85.00 \$16.67 \$45.00 \$28.33

The selling prices for the four products are

A B C D
\$98.00 \$38.50 \$59.50 \$49.00
Premier is considering a policy that would discontinue a product if its mark-on is under 25%. The mark-on is calculated by taking the selling price, subtracting the product’s standard cost, and dividing by the standard cost. Harrison is concerned that if the firm’s costing system does not provide accurate cost estimates, products will be dropped that should be retained. Arnold calculated that the mark-on for each product using the correct product costs in Table A is 40%.

TABLE B

PRODUCT A B C D
Selling price \$98.00 \$38.50 \$59.50 \$49.00
Unit cost \$70.00 \$27.50 \$42.50 \$35.00
Profit \$28.00 \$11.00 \$17.00 \$14.00
Mark-on percentage 40% (28/70) 40% (11/27.50) 40% (17/42.50) 40% (14/35)
Arnold then calculated the mark-on for the four products using the standard cost for each product based on allocating the overhead costs using direct labor hours.

PRODUCT A B C D
Selling price \$98.00 \$38.50 \$59.50 \$49.00
Unit cost \$85.00 \$16.67 \$45.00 \$28.33
Profit \$13.00 \$21.83 \$14.50 \$20.67
Mark-on percentage 15% 131% 32% 73%

Under the policy of dropping products with mark-ons under 25%, product A would be dropped. Arnold recalculates the allocation rate assuming product A is dropped and the manufacturing capacity is shifted to produce an additional 1,000 units of product B.

Product Labor hrs per unit Variable Ohd/unit Number of units Total labor hrs Total var ohd
B 1 7.50 2,000 2,000 \$15,000
C 3 5.00 1,000 3,000 5,000
D 2 7.50 1,000 2,000 7,500
Total 4,000 7,000 \$27,500

The new allocation rate is

Labor hours 7,000
Allocation rate per hour \$10.36

1. The firm allocates only variable product costs to each product based on direct labor hours. What is the contribution margin for each product? Which product or products should the company produce if it wants to maximize the contribution margin for all of the products it produces? What would be the impact on profits? How accurate is this method of allocating costs? If Premier stopped producing some products in its product line of tennis rackets, what might happen to the demand for the surviving products?

NOTE: A product’s contribution margin is its selling price minus its variable cost per unit.

2. What would happen if the firm modified its costing system so that all variable costs were traced to the product accurately, but fixed costs were allocated using the existing system? Compute the cost for each product using this allocation process. What would be the impact on profits? How accurate is this method of allocating costs?

Product Code-Case Study-AW-Q165