Smash Burgers is a fast-food restaurant that sells vegetarian burgers and hot dogs in a 1950s environment. The fixed operating costs of the company are $5,000 per month. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to either the burgers or the hot dogs. The following information is provided for the operations of the company: BurgersHot DogsSales for January4,0002,400Sales for February6,4002,400Required:a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for January? For February?b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs allocated to hot dogs also remain constant for January and February? Explain
why or why not. Comment on any other observations.
What will be an ideal response?
a.
January sales:
Burgers $5,000 × [4,000/(4,000 + 2,400)] = $3,125.
Hot dogs $5,000 × [2,400/(4,000 + 2,400)] = $1,875.
February sales:
Burgers $5,000 × [6,400/(6,400 + 2,400)] = $3,636.36.
Hot dogs $5,000 × [2,400/(6,400 + 2,400]) = $1,363.64.
b.
Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $500. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers.
Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 16%.
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