1. Given some of the problems with Sippican’s cost system, should executives abandon overhead assignment to product entirely and adopt a contribution margin approach? Why or why not? The overhead spending is greater than the direct labour costs or the direct material costs for all three product lines- Valves, Pumps and Flow Controllers (Exhibit 2). Overheads are simply charged at 185% constant for three diverse products. The fact that there is huge variance in the number of units produced per production run- it is 375 for valves and 18 for flow controllers per production run. This shows the reason for high overheads cost too. Hence it calls for checking the cost allocation system of the company.
Since Sippican produces three different products which comprise of different components, processes for all three need to be customised and refined to bring in any kind of standards. Variations in batch size owing to the machining constraints etc. are brought in by a disparity in the time required for production runs of all three products.
Even on increasing the price of the flow controllers the demand for the product did not go down, this gives an indication of the faulty pricing system.
Because of these reasons it seems that we should check the cost allocation system of the company.

2. Calculate the practical capacity and the capacity cost for each of the Sippican’s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers.

a) The first thing to do here is to find the actual capacity thats being used in each and every resource. For this purpose teh total number of units is first defined. Thereafter the total number of hours are found out which is available with the company as the number of days working and teh number of hours per day is available. Once that’s done teh