TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}
&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\
\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \
\text { Customisation costs } & 300 & 500 & 200 \
\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\
\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }
\end{array}$

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. Which customer's yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht?

Question

TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}
&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\
\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \
\text { Customisation costs } & 300 & 500 & 200 \
\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\
\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }
\end{array}$

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. Which customer's yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht?

Quizplus · Accepted Answer

The unavoidable costs are allocated based on the cost of a basic yacht, which is the same ($600) for all three types of yachts. Therefore, the allocation method does not affect the comparison of total costs, making the yacht with the lowest total costs before allocation (Big Winner, $1,000) also the one with the lowest total costs after allocation.

TMG Produces and Sells Yachts for Wealthy Customers Assume That All the Preceding Costs Are Avoidable