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How will the change in the way overhead is allocated affect

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Reference no: EM132551142

A company presently uses traditional volume based costing to allocate overhead to their products. Information on two of their products is as follows:

                          Product A                Product B

Selling price            $8                   $12

Direct Material         $2                    $3

Direct Labor              $1                    $2

Applied Overhead         $3                  $4

Gross Margin               $ 2                  $3

The company is considering implementing an activity based costing system. After identifying cost pools and cost drive the amount of overhead that would be applied to product A would drop to $2 per unit and the overhead applied to product B would increase to $8 a unit.

Question 1: How will the change in the way overhead is allocated affect the selling price of the both products?

a. The price of Product A would be decreased, and the price of product B would be increased

b. The price of Product A would be increased, and the price of products B would be increased.

c. The price of Product A would be increased, and the price of product B would be decreased.

d. The price of neither product would change

Reference no: EM132551142

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