The following information is available for the Rollin' Baby Company which produces two types of strollers, standard and deluxe. If the company allocates their fixed costs based on direct labor dollars, the profit before tax for the standard and deluxe product line, respectively, would be:
A) $8,000/$59,000
B) $19,000/$48,000
C) $16,000/$51,000
D) $24,800/$42,200

Question

The following information is available for the Rollin' Baby Company which produces two types of strollers, standard and deluxe.  If the company allocates their fixed costs based on direct labor dollars, the profit before tax for the standard and deluxe product line, respectively, would be:
A) $8,000/$59,000 
B) $19,000/$48,000 
C) $16,000/$51,000 
D) $24,800/$42,200

Quizplus · Accepted Answer

To calculate the profit before tax for each product line, we need to first allocate the fixed costs based on direct labor dollars.

The total direct labor dollars for the standard stroller is $40,000 ($20 per stroller x 2,000 strollers), and for the deluxe stroller it is $240,000 ($80 per stroller x 3,000 strollers).

The total fixed costs for the company are $200,000.

To allocate the fixed costs, we need to calculate the percentage each product line represents of the total direct labor dollars:

- Standard stroller: $40,000 / ($40,000 + $240,000) = 14.3% 
- Deluxe stroller: $240,000 / ($40,000 + $240,000) = 85.7%

Now we can allocate the fixed costs to each product line:

- Standard stroller: 14.3% x $200,000 = $28,600 
- Deluxe stroller: 85.7% x $200,000 = $171,400

To calculate the profit before tax for each product line, we can use the following formula:

Profit before tax = (Revenue - Variable costs) - Fixed costs

The revenue and variable costs for each product line are given in the table:

| Product | Revenue | Variable costs | 
|---------|---------|---------------| 
| Standard stroller | $80 | $60 | 
| Deluxe stroller | $200 | $140 |

Plugging in the numbers:

- Profit before tax for standard stroller: 
($80 x 2,000) - ($60 x 2,000) - $28,600 = $8,000 
- Profit before tax for deluxe stroller: 
($200 x 3,000) - ($140 x 3,000) - $171,400 = $42,200

Therefore, the correct answer is D, $24,800/$42,200.

The Following Information Is Available for the Rollin' Baby Company