Executive summary and statement of the problem
CCI implements different approaches to get 40% mark on for its four different products. During first cycle product A could not get minimum 25% mark up and due to that it became discontinue. After first cycle, CCI will charge $43 for product B, $78.498 for product C and $50 for product D. When it continues the same approach, product C's Mark up level is 6.12% which is less that 25% mark up level policy so CCI will discontinue production of C and increase production of B. Total allocated cost is $75000 and total labor hour are 5000 so allocation rate per hour will be $15. CCI will charge $77 for product B, $63for product D. Product B's Mark up level is -30% which is less that 25% mark up level policy so CCI will discontinue production of B and increase production of D
CCI's target is to get Maximum profit while selling at market price. Because of this below 25% mark on approach of CCI, there will be discontinuation happens of the products. Here CCI's existing accounting system is considering variable and fixed overhead into account along with direct material and direct labor in determining cost.
If CCI kept its cost system but differentiated between variable and fixed cost and decided to maximize contribution then the variable cost will be $60, $17.5, $30 and $22.5 for products A, B, C and D respectively. CCI will be able to get more than 25% mark up for all the products by using this approach and mark up are 63.33%, 120%, 98.33% and 117.78% for products A,B,C and D respectively. For this approach the total fixed cost will be 45000 and total labor hour will be 12000 so allocation rate is $3.75. The mark up will be 18.79%, 81.18%, 44.24% and 63.33% for product A, B, C and D. Here Product A will be discontinued according to 25% mark up policy. Production of B is increased and the new allocation rate per hour will be $6.43 and the mark up is...
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