SailAway has changed its product line from general paints to specialized marine coatings, which has caused overhead costs to double. Costs affected include customer service, production scheduling, inventory control, and laboratory work. The company has decided to analyze and update its cost information and pricing practices. Although some large orders are still received, most current business is generated from products designed and produced in small lot sizes to meet specifically detailed environmental and technical requirements. Management believes that large orders are being penalized and small orders are receiving favorable cost (and, thus, selling price) treatment.
a. Indicate why the shift in product lines would have caused such major increases in overhead.
b. Is it possible that management is correct in its belief about the costs of large and small orders? If so, why?
c. Write a memo to management suggesting how it might change the cost accounting system to reflect the changes in the business.