Howie Jones used the following information to calculate the profit coefficients for Aqua-Spas and Hydro-Luxes: pumps cost $225 each, labor costs $12 per hour, tubing costs $2 per foot. In addition to pumps, labor, and tubing, the production of Aqua-Spas and Hydro-Luxes consumes, respectively, $243 and $246 per unit in other resources that are not in short supply. Using this information, Howie calculated the marginal profits on Aqua-Spas and Hydro-Luxes as:

Howie€™s accountant reviewed these calculations and thinks Howie made a mistake. For accounting purposes, factory overhead is assigned to products at a rate of $16 per labor hour. Howie€™s accountant argues that because Aqua-Spas require nine labor hours, the profit margin on this product should be $144 less. Similarly, because Hydro-Luxes require six labor hours, the profit margin on this product should be $96 less. Who is right andwhy?

Transcribed Image Text:

Aqua-Spas Hydro-Luxes Selling Price Pump Cost Labor Cost Tubing Cost Other Variable Costs Marginal Profit $875 $72 -$246 $950 -$108 -$24 -$243