Chapter 2, Problem 2.42AP

Classify costs along the value chain (Learning Objectives 2 & 4)

Ravenna Cola produces a lemon-lime soda. The production process starts with workers mixing the lemon syrup and lime flavors in a secret recipe. The company enhances the combined syrup with caffeine. Finally, the company dilutes the mixture with carbonated water. Ravenna Cola incurs the following costs (in thousands):

Plant janitors’ wages	$1,100
Delivery truck drivers’ wages	$305
Payment for new recipe	$1,260
Depreciation on delivery trucks	$250
Plant utilities	$450
Lime flavoring	$820
Rearrangement of plant layout	$1,600
Bottles	$1,040
Salt	$50
Sales commissions	$425
Production costs of “cents-off” store coupons for customers	$800
Lemon syrup	$18,000
Replacement of products with expired dates upon customer complaint	$30
Depreciation on plant and equipment	$3,400
Wages of workers who mix syrup	$8,300
Customer hotline	$210
Freight-in on materials	$1,100

Requirements

1. 1. Classify each of the listed costs according to its category in the value chain (R&D, Design, Production, Marketing, Distribution, or Customer Service).
2. 2. Further break down production costs into three subcategories: Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH).
3. 3. Compute the total costs for each value chain category.
4. 4. How much are the total product costs?
5. 5. Suppose the managers of the R&D and design functions receive year-end bonuses based on meeting their unit’s target cost reductions. What are they likely to do? How might this affect costs incurred in other elements of the value chain?