Air Dream Products Has Contracted with You to Analyze and Update

question 89

Essay

Air Dream Products has contracted with you to analyze and update its costing and pricing practices. The company's product line has changed over time from general air conditioning units to customizable mini-split units. Although some large orders are received, the majority of business is now generated from products designed and produced in small lots in order to meet specific detailed environmental and technical standards.
The company has experienced increased overhead growth, including costs in customer service, production scheduling, inventory control and laboratory work. Overhead has doubled since the shift in product lines and management believes that the larger orders are being penalized, while smaller orders are receiving favorable cost and selling price treatment.
Required:
1. Why would the shift in product lines have caused such major increases in overhead?
2. Is it possible that management is correct in its belief about the costs of the large and small orders and, if so, why?
3. Write a memo to management suggesting how it might change the cost accounting system to reflect the changes in the business.

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Definitions:

Nominal Wage Rates

The amount of money paid to an employee by an employer in current prices, without adjusting for inflation.

Real Wages

Wages or salaries adjusted for inflation, reflecting the true purchasing power of income.

Potential Output

The economy’s maximum sustainable output, given the supply of resources, technology, and rules of the game; the output level when there are no surprises about the price level.

Natural Rate

The natural rate refers to the long-term unemployment rate that an economy experiences under normal conditions, unaffected by short-term cyclical fluctuations.