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REQUIRED a.) Revise the report assuming the company drops the economy grade.

b.) If either the standard or the deluxe grades is reporting a loss in part a, revise the report assuming that it is also dropped.

c.) Explain what Jeff means by the "cost allocation death spiral."

a.) Revise the report assuming the company drops the economy grade. b.)If either the standard or the deluxe grades is reporting a loss in part a, revise the report assuming that it is also dropped. c.) Explain what Jeff means by the "cost allocation death spiral."

ae eosts at Lennon results in unreasonably high charges to the Model 599 fan. PROBLEM 7-12. Cost Allocation Death Spiral [LO 1] Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet. Economy Standard Deluxe Total Yards of carpet Sales Less variable costs 30,000 45,000 75,000 150,000 S325,000 $700,000 $1,525,000 $2,550,000 (dye, yarn, labor, etc.) Less fixed costs (depreciation 175,000 925,000 1,530,000 430,000 supervisory salaries, etc.) Profit (loss) 243,000 162,000 405,000 210,000 (S 12,000) 27,000 195,000 Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that would lead to the cost allocation death spiral. 313

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