Reference no: EM132497375

FarmXL is a company that assembles purchased parts into components for 3 distinct markets - farm tractors, lawn mowers, gardening hand tools. You are the management accountant of this company and you have been requested to calculate the operating income of each market using total absorption costing. You have gathered the following information: Tractors Lawn mower Gardening tools Direct materials (total, in €) 175 000 125 000 100 000 Direct labor (total, in €) 50 000 100 000 200 000 Sales commissions (per unit, in €) 5 1 0.5 Machine hours (used in assembly) 8 500 2 500 1 500 Weight of components shipped to customers (in kilograms) 152 000 400 000 248 000 Number of components assembled and sold (in units) 5 000 25 000 50 000 Sales price per component (in € per unit) 80 20 10 Indirect costs: 1/ Manufacturing indirect costs: machines are used to assemble the parts into components. Costs of the machines (depreciation, maintenance, utilities ...) is 87 500 €. 2/ Transport costs to the customers' warehouses: 160 000€ 3/ General and administrative costs for the company are 281 250€. These G&A indirect costs will be allocated out to each market based on gross profit per market.

Assignment :

Question 1: What would you recommend as allocation factor for the manufacturing indirect costs? Why?

Question 2: What would you recommend as allocation factor for the transport costs to the customer's warehouses? Why?

Question 3: Calculate the allocation of indirect costs to each market.

Question 4: Calculate the operating income for each market using full costing methodology and format (assume starting inventories and closing inventories are nill)

Question 5: Comment your results. Provide recommendation to the company's owner in terms of how he could improve the overall profitability of the company.