You have been hired as a consultant for ABC Corporation which produces models X, Y, and...

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Accounting

You have been hired as a consultant for ABC Corporation whichproduces models X, Y, and Z. The CEO tells you that their costsystem indicated that they were losing money on their highest endmodel, which is model X. Due to that information, ABC Corporationdropped model X the previous year. During the current year, ABCCorporation is only producing models Y and Z. However, thepreliminary numbers are showing that the profit for ABC Corporationis actually lower after dropping model X and now the cost system isindicating that they are losing money on model Y even though theprices, volumes, and direct costs are the same. Explain to the CEOsome of the possible reasons that dropping model X caused areduction in profits. Also, explain some of the possible actionsthe company should take going forward. Would dropping model Ybenefit the company in any way? Is it possible that producing aproduct that is unprofitable by itself actually beneficial to thecompany overall?

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There are mainly Two costing systems adopted by the companies Applied overhead rates Activity Based Costing ABC The company was using applied overhead rates based on Labour hours or machine hours or anything which was used to apply overhead rates and as a result Product X was showing losses Let us break it down with an example Assuming company applies its overhead cost based on how many Direct Labour hours are used in manufacturing of a product Product X was consuming far much Direct labour hours than product Y and Z and as See Answer

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You have been hired as a consultant for ABC Corporation whichproduces models X, Y, and Z. The CEO tells you that their costsystem indicated that they were losing money on their highest endmodel, which is model X. Due to that information, ABC Corporationdropped model X the previous year. During the current year, ABCCorporation is only producing models Y and Z. However, thepreliminary numbers are showing that the profit for ABC Corporationis actually lower after dropping model X and now the cost system isindicating that they are losing money on model Y even though theprices, volumes, and direct costs are the same. Explain to the CEOsome of the possible reasons that dropping model X caused areduction in profits. Also, explain some of the possible actionsthe company should take going forward. Would dropping model Ybenefit the company in any way? Is it possible that producing aproduct that is unprofitable by itself actually beneficial to thecompany overall?