Required: a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape. b. What is the cost of unused capacity? c. Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottling’s market, assume that it would use 15,100 hours of machine time to make 151,000 units. (Recall that the machine capacity in this case is 30,200 hours, while Diet, Regular, Cherry, and Grape consume only 15,100 hours.) Vanilla cola’s per unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total.
| Monthly Report on Cola Bottling Line | |||||||||||||||||||
| Diet | Regular | Cherry | Grape | Total | |||||||||||||||
| Sales | $ | 168,000 | $ | 109,200 | $ | 32,250 | $ | 9,000 | $ | 318,450 | |||||||||
| Less: | |||||||||||||||||||
| Materials | 60,000 | 44,400 | 13,800 | 5,000 | 123,200 | ||||||||||||||
| Direct labor | 19,000 | 11,000 | 3,000 | 500 | 33,500 | ||||||||||||||
| 7,600 | 4,400 | 1,200 | 200 | 13,400 | |||||||||||||||
| Indirect costs (@260% of direct labor) | 49,400 | 28,600 | 7,800 | 1,300 | 87,100 | ||||||||||||||
| Gross margin | $ | 32,000 | $ | 20,800 | $ | 6,450 | $ | 2,000 | $ | 61,250 | |||||||||
| Return on sales (see note [a]) | 19.0 | % | 19.0 | % | 20.0 | % | 22.2 | % | 19.2 | % | |||||||||
| Volume | 80,000 | 52,000 | 15,000 | 4,000 | 151,000 | ||||||||||||||
| Unit price | $ | 2.10 | $ | 2.10 | $ | 2.15 | $ | 2.25 | $ | 2.11 | |||||||||
| Unit cost | $ | 1.70 | $ | 1.70 | $ | 1.72 | $ | 1.75 | $ | 1.70 | |||||||||
a Return on sales before considering selling, general and administrative expenses.
He then turned to the quietest person in the room—his son, Rocky—and said, “I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products.”
Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found:
| Indirect labor | $ | 33,500 |
| Fringe benefits on indirect labor | 13,400 | |
| Information technology | 21,400 | |
| Machinery depreciation | 11,000 | |
| Machinery maintenance | 5,200 | |
| Energy | 2,600 | |
| Total | $ | 87,100 |
Then, he began a series of interviews with department heads to see how to assign these costs to cost pools. He found that 40 percent of indirect labor was for scheduling or for handling production runs, including purchasing, preparing the production run, releasing materials for the production run, and performing a first-time inspection of the run. Another 50 percent of indirect labor was used to set up machinery to produce a particular product. The remaining 10 percent of indirect labor was spent maintaining records for each of the four products, monitoring the supply of raw materials required for each product, and improving the production processes for each product. This 10 percent of indirect labor was assigned to the cost driver “number of products.”
Interviews with people in the information technology department indicated that $21,400 was allocated to the cola bottling line. 80 percent of this $21,400 information technology cost was for scheduling production runs. 20 percent of the cost was for record keeping for each of the four products.
Fringe benefits were 40 percent of labor costs. The rest of the overhead was used to supply machine capacity of 30,200 hours of productive time.
Rocky then found the following cost driver volumes from interviews with production personnel.
- Setups: 740 labor-hours for setups.
- Production runs: 260 production runs.
- Number of products: 4 products.
- Machine-hour capacity: 30,200 hours.
Diet cola used 260 setup hours, 100 production runs, and 8,000 machine-hours to produce 80,000 units. Regular cola used 90 setup hours, 60 production runs, and 5,200 machine-hours to produce 52,000 units. Cherry cola used 300 setup hours, 60 production runs, and 1,500 machine-hours to produce 15,000 units. Grape cola used 90 setup hours, 40 production runs,and 400 machine-hours to produce 4,000 units. Rocky learned that the production people had a difficult time getting the taste just right for the Cherry and Grape colas, so these products required more time per setup than either the Diet or Regular colas.
Required:
a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.
b. What is the cost of unused capacity?
c. Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottling’s market, assume that it would use 15,100 hours of machine time to make 151,000 units. (Recall that the machine capacity in this case is 30,200 hours, while Diet, Regular, Cherry, and Grape consume only 15,100 hours.) Vanilla cola’s per unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total.
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