Allocating facility-level cost and a product elimination decisionHolby Boards produces two

Allocating facility-level cost and a product elimination decision

Holby Boards produces two kinds of skateboards. Selected unit data for the two boards for the last quarter follow.

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Basco Boards

Shimano Boards

Production costs

 

 

Direct materials

$54

$72

Direct labor

$78

$102

Allocated overhead

$30

$36

Total units produced and sold

4,000

8,000

Total sales revenue

$672,000

$1,776,000

Holby allocates production overhead using activity-based costing. It allocates delivery expense and sales commissions, which amount to $108,000 per quarter, to the two products equally.

Required

a. Compute the net profit for each product.

b. Assuming that the overhead allocation for Basco boards includes $24,000 of facility-level cost, would you advise Holby to eliminate these boards? (Hint. Consider the method used to allocate the delivery and selling expense.)

 

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