A firm produces two products in the same facility using the same equipment. Product LZP is produced in large batches, while Product CAF is produced in small batches. Additionally, it takes very little set-up time to prepare to produce a batch of Product LZP while a batch of Product CAF requires a more time-consuming set-up. Product LZP is a higher volume product that takes a relatively small amount of machine-time per unit to produce, while Product CAF is a lower volume product that takes a significantly higher amount of machine-time per unit to produce. Customers who purchase LZP make relatively large purchases (in terms of the number of units purchased) while customers who purchase CAF make relatively small purchases (in terms of the number of units purchased). Both products are shipped in a similar way, with each shipment requiring a similar amount of work.

a) If this firm allocates manufacturing overhead based on production volume, what result would you expect?

b) How could the firm improve its allocation system?

Answer rating: 100% (QA)

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