Chapter 9, Problem 32E

Reported Costs and Decisions

Kima Company manufactures and sells two models of a home appliance. The Standard model is a basic appliance with mostly manual features, while the Galaxy model is highly automated. The appliances are produced to order, and there are no inventories at the end of the year.

The cost accounting system at Kima allocates overhead to products based on direct labor cost. Overhead in year 1, which just ended, was $3,120,000. Other data for year 1 for the two products follow:

Required

1. a.      Compute product line profits for the Standard model and the Galaxy model for year 1.
2. b.      A study of overhead shows that without the Standard model, overhead would fall to $2,250,000. Assume all other revenues and costs would remain the same for the Galaxy model in year 2. Compute product line profits for the Galaxy model in year 2 assuming the Standard model was not produced or sold.