Elon Musk, the man who is responsible for revolutionizing the automotive space is confused. Why you ask?

He met with Ms. Static who explained to him that under the current allocation system, engineering costs amount to $46,880 per Model S and $15,630 per Model X. Elon responds:

"How - Look at the Model X - its freaking awesome and is insanely over engineered. How can it cost leass than our base model?" he decides to hire you as a consultant to drive transparency into the costs ...

Problem: Develop ABC to clear the mess up

Cost Pool Activity Costs Cost Driver Driver Machine Setup $360,000 Setup Hours 4,000

Materials Handling $100,000 Materials (Lbs) 20,000

Utility $40,000 Kx/hr 40,000

Information by Product Model S Model X

Units 4,000 20,000

Direct Materials$ 42,000$ 54,000

Direct Labor$ 24,000$ 40,000

Setup Hours 200 240 Materials 1,000 3,000 Kw/Hr 2,000 4,000

i. What is the "true" profitability of Model S and Model X

ii. What/How do you suspect Ms. Static arrived at her numbers?

iii. Knowing Tesla's business- are there additional things that you would look into in cost allocation? (Remember: Tesla has significant costs related to battery, R&D, software programming, QAing etc)

iv. Should Tesla evaluate customer profitability analysis or product profitability analysis? Defend your choice with at least 2 advantages.