Cost Data for Almond Dream, Krispy Krackle, and Creamy Crunch Product costs Labor-hours per case Total cases produced Material cost per case Direct labor cost per case duct Almond Dream Krispy Krackle Creamy Crunch 7 1,000 $8 $42 7.000 3 1,000 $2 $18 3,000 1 1,000 $9 $6 1,000
Cost Data for Almond Dream, Krispy Krackle, and Creamy Crunch Product costs Labor-hours per case Total cases produced Material cost per case Direct labor cost per case duct Almond Dream Krispy Krackle Creamy Crunch 7 1,000 $8 $42 7.000 3 1,000 $2 $18 3,000 1 1,000 $9 $6 1,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:**Cost Data for Almond Dream, Krispy Krackle, and Creamy Crunch**
| Product Costs | Almond Dream | Krispy Krackle | Creamy Crunch |
|-------------------------------|--------------|----------------|---------------|
| Labor-hours per case | 7 | 3 | 1 |
| Total cases produced | 1,000 | 1,000 | 1,000 |
| Material cost per case | $8 | $2 | $9 |
| Direct labor cost per case | $42 | $18 | $6 |
| Labor-hours per product | 7,000 | 3,000 | 1,000 |
- **Total overhead = $69,500**
- **Total labor-hours = 11,000**
- **Direct labor costs per hour = $6**
- **Allocation rate per labor-hour = (a).**
**Costs of Products:**
| | Almond Dream | Krispy Krackle | Creamy Crunch |
|------------------------------|--------------|----------------|---------------|
| Material cost per case | $8 | $2 | $9 |
| Direct labor cost per case | 42 | 18 | 6 |
| Allocated overhead per case | (b) | (c) | (d) |
| Product cost | (e) | (f) | (g) |
**Tasks:**
**A.** Based on the additional data, determine the product cost and gross profit margin percentages of each product using the three allocation bases (labor-hours, machine-hours, and square feet) to determine the allocation assigned to each product.
**B.** Would management recommend dropping any product based on the criterion of dropping products with less than 10 percent gross profit margin?
**C.** Based on the recommendation you make in requirement (B), recalculate the allocations and profit margins to determine whether any of the remaining products should be dropped from the product line. If so, substantiate the profitability of remaining products.
Transcribed Image Text:**Understanding Overhead Allocation in Product Profitability**
Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable. She notices that $30,000 of the overhead originated from the equipment used. She decides to incorporate machine-hours into the overhead allocation base to determine the effect on product profitability. Almond Dream requires 2 machine-hours per case, Krispy Krackle requires 7 hours per case, and Creamy Crunch requires 6 hours per case. Additionally, Jean notices that the $15,000 per month spent to rent 10,000 square feet of factory space accounts for almost 22 percent of the overhead. The assignment of square feet is 1,000 to Almond Dream, 4,000 to Krispy Krackle, and 5,000 to Creamy Crunch. Jean decides to incorporate this into the allocation base for the rental costs.
Because labor-hours are still an important cost driver for overhead, Jean decides that she should use labor-hours to allocate the remaining $24,500.
CBI still plans to produce 1,000 cases each of Almond Dream, Krispy Krackle, and Creamy Crunch. Assume that CBI can sell all products it manufactures and that if it drops any products, it will use excess capacity to produce additional cases of the most profitable product. Overhead will remain $69,500 per month under all alternatives.
Expert Solution
Step 1
This question is based on cost allocation of Cost Accounting .
A. Statement showing Gross Profit and product Margin
| Particulars | AD | KK | CC | Total (Per month) |
| Total Labour Hours | 7000(63.6%) | 3000(27.3%) | 1000(9.1%) | 11,000(100%) |
| Total Machine hours | 2000(13.3%) | 7000(46.7%) | 6000(40%) | 15,000(100%) |
| Total Rent (Factory) | $15000 | |||
| Total Machine usage Cost | $30,000 | |||
| Other Overheads (69500-15000-30000) | $24500 | |||
| Total Production | 30,000 Cases | |||
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