Keep-or-Drop: Traditional Versus Activity-Based Analysis Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow: Peanut Butter units of Purchaseb Expected sales (in cases) 50,000 Cashew Unused Butter Capacity 10,000 $80 10,000 Selling price per case $100 Direct labor hours 40,000 . As needed Receiving orders 500 250 250 500 Packing orders 1,000 500 500 250 Material cost per case $55 $48 Direct labor cost per case $12 $9 Advertising costs $200,000 $70,000 *Practical capacity less expected usage (all unused capacity is permanent). bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity. Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver. Activity Fixed Variable Direct labor benefits $0 200,000 $200,000 250,000 Machine Receiving 200,000 22,500 Packing 100,000 45,000 Total costs $500,000 $517,500 *Costs associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver. These costs are for the actual levels of the cost driver. Required:
Keep-or-Drop: Traditional Versus Activity-Based Analysis Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow: Peanut Butter units of Purchaseb Expected sales (in cases) 50,000 Cashew Unused Butter Capacity 10,000 $80 10,000 Selling price per case $100 Direct labor hours 40,000 . As needed Receiving orders 500 250 250 500 Packing orders 1,000 500 500 250 Material cost per case $55 $48 Direct labor cost per case $12 $9 Advertising costs $200,000 $70,000 *Practical capacity less expected usage (all unused capacity is permanent). bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity. Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver. Activity Fixed Variable Direct labor benefits $0 200,000 $200,000 250,000 Machine Receiving 200,000 22,500 Packing 100,000 45,000 Total costs $500,000 $517,500 *Costs associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver. These costs are for the actual levels of the cost driver. Required:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Keep-or-Drop: Traditional Versus Activity-Based Analysis
Transcribed Image Text:Keep-or-Drop: Traditional Versus Activity-Based Analysis
Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products
follow:
Peanut
Butter
50,000
Cashew Unused
Butter Capacity²
10,000
units of
Purchaseb
Expected sales (in cases)
Selling price per case
$100
$80
10,000
Direct labor hours
40,000
-
As needed
Receiving orders
500
250
250
500
Packing orders
1,000
500 500
250
Material cost per case
$55
$48
Direct labor cost per case
$12
$9
$70,000
Advertising costs
$200,000
apractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps
are provided as necessary. The cost per step is the fixed activity rate multiplied by the
step units. The fixed activity rate is the expected fixed activity costs divided by practical
activity capacity.
Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver.
Activity
Fixeda
Variableb
Direct labor benefits
$0
$200,000
250,000
Machine
200,000
Receiving
200,000
22,500
Packing
100,000
45,000
Total costs
$500,000
$517,500
Costs associated with practical activity capacity. The machine fixed costs are all
depreciation with direct labor hours as the driver.
These costs are for the actual levels of the cost driver.
Required:
Transcribed Image Text:2. Prepare an activity-based segmented income statement. Use a minus sign to indicate a negative product margin.
Nutterco, Inc.
Activity-Based Income Statement
Peanut Butter
Cashew Butter
Total
X
X
X
X
X
X
Contribution margin
X
Less traceable expenses:
X
X
X
X
X
Product margin
X
X
Less unused activity expenses:
X
X
X
X
Operating income
Using ABC approach, determine whether the cashew butter product line should be kept or dropped.
Dropped
X
X X X
$
хх
X
X
X
X
хх
X
X
X
XX
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