2. Standard unit costs and revised unit costs both show that the highest product cost is pump product line. However, our transaction-based analysis shows it should be the flow controllers. We can tell that the unit costs have been badly distorted as a result of using single allocation basis (production-run labor cost). …show more content…
The strategies that I would recommend to the company are: a. Cutting the price of pumps to better compete with other suppliers in the market. Comparing the product cost between the new activity-based system and traditional system, we can easily find out that the company has been overestimated the pump cost. Thus, they thought the profit margin should be merely 22%. By reallocating the overhead costs more accurately, we found the profit margin should be doubled to 40%. (Table 2) The number shows that the profit margin of pump is much higher than their estimation.
Besides, the competitors in market have been cutting prices to attract more customers and opportunities. We suggest the company should start cutting the pump price to better compete with those pump suppliers in the market. b. Increase the price of flow controllers or give up the product