Final answer:
In cost allocation, when overhead cost is divided among products based on units produced, Product C with 70 units will absorb the most of the $100 overhead cost, as each unit is allocated $1 of the overhead.
Step-by-step explanation:
The question involves cost allocation, specifically the allocation of an overhead item cost among different products based on their units of production. Overhead, also known as a fixed cost, is a type of cost that does not vary with the level of production or sales. When you divide the total fixed cost by the number of units produced, you get the average fixed cost. Assuming the fixed cost is $1,000, the average fixed cost curve on a graph will typically show a downward slope, as the more units produced, the lower the average fixed cost per unit.
To determine which product will absorb the most of the $100 overhead cost when the allocation is based upon units produced, you must consider the total units of each product. The formula is simple:
Total Overhead Cost / Total Units Produced = Overhead Cost per Unit
For the given scenario:
- 10 units of Product A
- 20 units of Product B
- 70 units of Product C
Adding these up gives a total of 100 units produced (10 + 20 + 70). Therefore, each unit receives $1 of overhead cost ($100 / 100 units).
Now, to find out how much of the $100 overhead each product absorbs:
- Product A: 10 units * $1 = $10
- Product B: 20 units * $1 = $20
- Product C: 70 units * $1 = $70
So, Product C will absorb the most of the $100 overhead cost, since it has the highest number of units produced.