Cci Case

Statement of the Problem

The production costs for CCI’s products seem to make some products extremely profitable while others are moderately profitable. The problem lies within the cost accounting system as concluded by the outside management consultant, Peterzon, who was hired to analyze the firm’s cost system. The problem with the cost accounting system’s model, as it stands, is that fixed costs are assigned to the allocation rate in such a way that they drive up the rate per hour, independent of the variable costs.

Executive Summary

The question is which costs ought to be used in order to set prices that are competitive while allowing for CCI’s profit requirements. The fixed costs must be dealt with in a different fashion if any product mix is to be agreed upon which will allow cost-based pricing at competitive rates. The variable overhead costs needs to be tied to each individual product in a way that seems reasonable. Keeping the existing cost system but differentiating between variable and fixed costs with an emphasis on maximizing contributions, is the solution since it allows CCI to keep all existing products.

Analysis

With the new allocation rate set at $10.36 per hour, the price CCI will have to charge to reach a 40% mark-on are as follows:

* Product B $28.51

* Product C $78.51

* Product D $50.01

This would allow only Product B to be sold at its industry standard price of $38.50. However, adding mark-ons of 25% produces the following prices:

* Product B $25.45

* Product C $70.10

* Product D $44.65

This would also allow Product D to be sold at industry standard of $49.00. Product C, in this case, would have to be dropped.

If Product C were dropped and the allocation rates were refigured at $15.00, the following prices would have to be charged to reach the 40% mark-on:

* Product B $35.00

* Product D $63.00.

This would allow only Product B to be sold at its industry standard price...