Narnia Inc
Size-Up Narnia Inc is in the manufacturing industry, and is competing against three companies, that are newly releasing the same unique products as Narnia’s. Narnia originally competed through their new innovative products, but will be forced to compete through low cost when the other companies release their products. The organization needs to take control and allocate their costs appropriately in order to be able to price their products lower, to where the new companies have said to be pricing theirs. Each product requires a different amount of labour, as some integrate machine assembly more than others. This greatly affects the costs of the products, as labour, in this case, costs more than machine work. The issue is that the new company X is able to offer Product A at a substantially cheaper price then Narnia, while company Z has to charge significantly more than Narnia for Product Z. Through these companies specializing in only one product, have they perfected their production volume better then Narnia to allow for the best allocation of costs resulting in a more effective cost analysis and breakdown? Is there a more effective volume of each product for Narnia to achieve the lowest costs possible? What will result when Narnia doubles the production of Product C – will their costs be more similar or dissimilar after the reallocation of production costs?
Analysis
I am assuming that the accountant has made a good judgment decision by allocating the other costs by amount of labour, and will assume this to be an effective allocation method. If the accountant was to be wrong by this allocation decision, the net resulting costs of each product could result in a significantly different cost basis.
After reconstructing the Table’s with the new production amounts, accounting for Product C being doubled, it appears that the prices have leveled out.
Narnia’s costs with double Product C
Product A
Product B
Product C
Material per unit
$6
$12
$18
Labor per