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Question $2$:

The AB Company makes two products, A and B$.$ The company has a dual$-$rate cost

allocation in place, which allocates fixed overhead strictly on the basis of budgeted cost

driver data, and allocates using normal costing. Budgeted information for a

representative month is as follows $($material costs are negligible$)$:

Moreover, the firm budgets variable overhead cost of $$800,000$ and fixed overhead of

$$700,000,$ per month.

The firm receives two special short$-$term offers: customer ANDROYD offers to buy an

additional $1,000$ units of $A$ at a unit price of $$95$; customer BOSQUIAT offers to buy an

additional $1,500$ units of $B$ at a unit price of $$55.$ The firm has sufficient capacity to

accept either offer or both offers $($those by ANDROYD and by BOSQUIAT$).$

Required:

a$.$ Suppose the firm allocates variable overhead based on direct labor. Which of the

two special offers, if any, should be accepted? Explain your finding.

b$.$ Ignore the information in part a$.$ and instead suppose the firm allocates variable

overhead based on ABC, using three cost pools:

Product A uses $0\mathrm{.}4$ machine$-$hours per unit, Product $B$ uses $0\mathrm{.}5$ machine$-$hours

per unit. The firm ships products A and B in shipments of $100$ units, each. Lastly,

warranty costs are roughly the same for the products on a per$-$unit basis.

Which of the two special offers, if any, should be accepted based on the ABC

system? Explain your finding.

c$.$ Can the ABC system in part $B$ be simplified without any loss of insight?

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