CMA Study Group

 View Only
  • 1.  CVP - PART 2 CMA

    Posted 09-19-2020 02:33 PM

    what do they mean by allocated fixed overhead?

    A firm manufactures several different products, including a premium lawn fertilizer and weed killer that is popular in hot, dry climates. The firm is currently operating at less than full capacity because of market saturation for lawn fertilizer. Sales and cost data for a 40-pound bag of lawn fertilizer is as follows.
    Selling price
    $18.50
    Production cost:
    Materials and labor
    $12.25
    Variable overhead
    3.75
    Allocated fixed overhead
    4.00
    20.00
    Income (loss) per bag
    $ (1.50)
    On the basis of this information, which one of the following alternatives should be recommended to management?
    Answer (A) is correct.
    The relevant margin on this product is $2.50, not a loss of $(1.50). The fertilizer is covering all of its variable costs with some left over to cover fixed costs (the fixed costs that have been allocated are not traceable to this product).


    ------------------------------
    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
    ------------------------------