As the marketing manager for Fast Fones Industries Pty Ltd, you have asked the accountant what it costs to make the Fone2000 model because you want to set a price for the phone. A similar phone produced by a competitor sells for $600. Your usual pricing policy is to set the price of phones at twice the cost of manufacturing them. The accountant has not been entirely helpful in giving you the following costs:

Direct materials Direct labour If allocated on direct labour hours (DLH) factory overhead per phone is $760 per DLH and each phone takes ¼ DLH to manufacture. If allocated on labour costs factory overhead per phone is 10 times direct labour costs. If allocated on machine hours (MH) factory overhead per phone is $400 per MH and each phone take ½ MH to manufacture.

$90 15

Required

A. Assuming that the total factory overhead to be allocated to the various phone models produced by by Fast Fones Industries Pty Ltd is $2400000, what are the implications of allocating too much, or too little, factory overhead to the cost of each Fone2000?

B. Calculate the cost and the price of the Fone2000 using each of the factory overhead rates that the accountant has supplied. How does the different allocation methods for factory overhead affect the pricing of the Fone2000 compared to the price of the competition and what are the likely implications of this for how well the phone does in the phone market?