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Dawson Company manufactures three types of computer games: Skyhawk, Seahawk, and Sharks. It allocates overhead to the games based on the number of direct labor hours worked on each product. The results of the most recent period follow:
Skyhawk
Seahawk
Sharks
Units produced and sold
9,000
8,000
7,000
Selling Price
$45.00
$30.00
$25.00
Less:
Direct materials per unit
5.50
4.25
3.00
Direct labor cost per unit
9.00
2.00
Manufacturing overhead per unit
27.00
6.00
Gross Margin
3.50
17.75
10.00
Selling cost per unit
2.25
1.50
1.25
Administration cost per unit
3.75
2.75
Net Income (loss) per unit
$(2.50)
$13.25
$6.00
The manager of Dawson Company is concerned that the Skyhawk game seems to be a net loser and he is considering whether to discontinue it. He has asked you to analyze the situation and make a recommendation. Your analysis reveals that Dawson Company has three levels of overhead - faculty sustaining, batch-related, and unit-related - and that the appropriate overhead rates are $6.00 per square foot, $1,000 per production run, and $4 per unit, respectively. Resource usage during the past period follows. In addition, you discover that administrative costs are fixed while selling costs are variable per unit.
Square feet occupied
10,000
12,500
15,000
Production runs
9
12
Required:
A. Determine whether Dawson Company should drop any game.
B. Write a memo to the manager with your recommendation.
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