Acct

3

with costs in the cost pool. Therefore, the indirect costs will be assigned based on the consumption of resources to different products more accurately.

2.

Based on your analysis for requirement 1, advise on the actions that

EWF’s management team might take to improve the company’s

profitability.

EWF’s management can use the information of the ABC system to make a  better pricing decision to improve the company’s profitability. The manager may

readjust the prices of simple desk and corner workstation.

Table4: Product profitability analysis(ABC system)

Simple desk(per unit) Corner workstation(per unit) Full manufacturing costs $257.5 $1059.5 Markup (60%) $154.5 $635.7

EWF’s Selling price

$412 $1695.2 Gross margin 37.5% 37.5%

Competitors’ price

 $420 $1650 To set the prices of simple desk and corner workstation as manufacturing costs plus 60% markup (see Table4). The manager should sell simple desk at $412 which

is lower than the competitors’ price

, $420. It will increase the competitiveness and attract more customers. In addition, the gross margin is 37.5%. It is higher than the 35%, so it could cover all nonmanufacturing costs and earn a

4

reasonable return for company. As for the corner workstation, the price should be set at $1695.2 in order to

earn 60% markup. However, the price is higher than the competitors’ price, $1650.

Since the competition in the furniture industry is keen, the higher price, the more  business will be lost. At least, EWF is required

to set price same as the competitors’

$1650 to stay competitive in the industry. Even though, it cannot earn 60% markup,  but till has 35.79% [(1650-1059.5) ÷ 1650] gross margin, which is higher than 35%. It is better to sets price at $1650 to earn few profits instead of setting higher  price and earning high more gross profit per unit, but losing business. In the conclusion, EWF should set price of simple desk at $412 to increase its competitiveness...