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As expansion has been the main focus for Anagene Inc., continuous changes in an emerging field has made it difficult to assess costs and give investors a clear insight on projected sales. It is important to understand the nature of the external environment the company is operating within. The genome field is relatively new and with many breakthrough technologies entering the industry. However, the company has seen success, as it has leveraged microelectronics in its microarray design. The company has found an opportunity in this new niche market and has shifted its focus from research and development to manufacturing research applications. The company’s main operations are now narrowed down to their work stations and cartridge sales. Even though future trends are forecasted to be optimistic, with large fluctuations occurring and limited information on hand, the company is “still feeling their way in the dark.” The main issue faced by Anagene Inc. is that the margins for cartridges have been decreasing and standard costs have increased about 40%. Furthermore, since product costs have been unpredictably fluctuating from month-to-month, gross margins have been fluctuating accordingly, which makes it difficult to understand profitability. There are three alternative ways to solve this problem. Firstly, Anagene Inc. can choose to not assign fixed overhead costs by using the contribution margin approach. Moreover, they can assign fixed overhead costs per unit based on budgeted production or practical capacity. After a thorough evaluation of the alternatives, it is suggested that Anagene allocates its fixed overhead costs based on practical capacity because the numerator in an activity cost driver rate calculation represents the costs of supplying resource capacity to do work, therefore the denominator should represent the quantity of work the resources can perform. This method stabilizes their gross margins as well as increases their margins by charging a more accurate and representative price for the cartridges. Background 3