Chapter 2, Problem 2.47BP

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

Crystal 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. Crystal Cola incurs the following costs (in thousands):

Delivery truck drivers’ wages	$285
Lemon syrup	$16,000
Depreciation on delivery trucks	$175
Lime flavoring	$1,020
Payment for new recipe	$ 1,090
Customer hotline	$220
Sales commissions	$450
Production costs of “cents-off” store coupons for customers	$630
Rearrangement of plant layout	$1,200
Freight-in on materials	$1,300
Depreciation on plant and equipment	$2,900
Bottles	$1,490
Salt	$15
Plant utilities	$1,250
Wages of workers who mix syrup	$7,900
Plant janitors’ wages	$1,000
Replacement of products with expired dates upon customer complaint	$40

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?