pricing, profits, costs and analysis, product management
Review the activity below or download the PDF student worksheet
Student Discussion Task
Allocating fixed costs to products, in order to more fully assess product profitability, can be determined in different ways with different outcomes.
In the following example, the firm has allocated its fixed costs equally each of its products – what impact does this have?
|Key Financials||Product A||Product B||Product C||Product D||TOTAL|
|Share of fixed costs||$1.5m||$1.5m||$1.5m||$1.5m||$6m|
Student Discussion Questions
- In the above table, Product B is unprofitable when taking into account fixed costs. What should the firm do with this product; keep it or withdraw it?
- If the firm was to withdraw Product B, how would that affect its overall profitability and the profitability of each product?
- Other than allocating fixed costs equally, what other approaches could be used? What approach would you recommend in this case?
Calculate Activity-Based Product Costs (textbook chapter)