Step 1: Allocate Costs
You have been asked to look at production options for the Android01 since production methods and allocation of costs have implications for cost-per-unit. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.
Costs are as follows:
- $4.5 million per year in rent for factory and machinery
- components and labor in the amount of $12 million will produce 300 units per year
In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.
The variable cost of the production facilities and service divisions is $20 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.
|Processor01 (500 units)||70,000||120|
|Android01 (300 units)||30,000||80|
The remaining cost for the production of Android01 is for components, at $25,000 per unit.
Question 1: In Method B, what would be the cost-per-unit of producing Android01 using factory space as the allocation basis? What would be the cost-per-unit using labor as the allocation basis?
Before starting on your calculations, review materials on production cost allocation.
Written narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.