Fixed cost allocation and determination of overhead allocation rates

(a)The application rate of Iron Horse is 6.55 while the application rate for RobbieReid is 19.41. Theapplication amounts for each product according to the departments are $4,435,200.00 and $1,497,600.00, respectively.

(b) The Applied Overhead rates for Iron Horse at 6.55 per unit at 1.097 Million Pairs is at =7.185 Million and for Robbie Reid at application rate is at 19.41 for 127 k pairs are at= 2.46 Million. This resolves that the over absorption of fixed heads are allocated, creating more amounts being allocated. Under the departmental allocation rates, 1.5 Million is allocated under the Robbie Reid criteria, however, the rest of the amount from the 5.92 Million is allocated to the Iron Horse.

(c)The ultimate purpose of using the effectiveoverhead application rate is that it compares cost to productivity in order to yield a final and conclusive rate which can be used by the company to compare the cost to efficiency.

The most effective approach to BBC is the departmental application rate as there are many departments involved in the manufacturing of boots. The workers are also responsible to supply talent and labor in making boot products. It is effective for BBC because it is easy to manage, also adecision must be taken with regard to keep the cost inline. Additionally, the company also intends to add more product lines, i.e.RobbieReid and Iron Horse, having separate costs,areadvantageous for the company.

The activity basedcosting would surely be a practical approach in the first 5 years of business operations because it would provide more accurate information due to the incremental value of overhead cost and overall production, it would also prevent understating and overstating in the pricing of products, additionally, it would most probably allow the company to eliminate the non-value-added or unwanted activitywithout reducing the value of the product. It would also improve the productivity of the company.

Analysis of profitability of adding the Robbie Reid hiking boot into BBC product mix

The breakeven analysis of Iron Horse is 176.130 showing the point at which, the revenue generated from selling Iron Horse product would equal to the associated cost with receiving revenue.

The breakeven analysis of Robbie Reid is 21428.57143units, which is more than Iron Horse.

The lower breakeven for Iron Horse showing that the company can open up to new and niche markets, high brand recognition, attractive designs and better protection from competitors.

The difference in the margin of safety for the breakeven is 1174823.869, 1153571.429 and 1169312.257. The combined breakeven of both Robbie Reid and Iron Horse is 5687.742914 units.

Service department cost allocation

The operating department of the company is engaged in manufacturing products or performing primary purposes for the customers. The cost of the service department is allocated to the operating department of the company because the service department primarily supports the operatingdepartment. The cost of service department should be allocated to operating department in order to accurately and clearly reflect the cost of conducing the business in the operating department……………….

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