Question

Sara’s Salsa Company produces its condiments in two types: Extra Fine for restaurant customers and Family Style for home use. Salsa is prepared in department 1 and packaged in department 2. The activities, overhead costs, and drivers associated with these two manufacturing processes and the company’s production support activities follow.

Process	Activity	Overhead cost			Driver	Quantity
Department 1	Mixing	$	5,800		Machine hours	2,200
	Cooking		12,900		Machine hours	2,200
	Product testing		113,800		Batches	1,000
		$	132,500
Department 2	Machine calibration	$	315,000		Production runs	500
	Labeling		20,000		Cases of output	145,000
	Defects		9,000		Cases of output	145,000
		$	344,000
Support	Recipe formulation	$	82,000		Focus groups	40
	Heat, lights, and water		33,000		Machine hours	2,200
	Materials handling		78,000		Container types	8
		$	193,000

Additional production information about its two product lines follows.

	Extra Fine		Family Style
Units produced	33,000	cases	112,000	cases
Batches	330	batches	670	batches
Machine hours	900	MH	1,300	MH
Focus groups	30	groups	10	groups
Container types	6	containers	2	containers
Production runs	240	runs	260	runs

Required:
1. Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa.
2. Using the plantwide overhead rate, determine the total cost per case for the two products if the direct materials and direct labor cost is $9 per case of Extra Fine and $8 per case of Family Style.
3.a. If the market price of Extra Fine Salsa is $18 per case and the market price of Family Style Salsa is $12 per case, determine the gross profit per case for each product.
3.b. What might management conclude about the Family Style Salsa product line?

Answer 1

Answer:

1)

Plantwide overhead rate         =   Total Department Overhead cost / Total Units Produced         =     ( $ 132,500 + $ 344,000 + $ 193,000 ) / (33,000 + 112,000 )         =      $ 669,500 / $145,000 )         =     $ 4.62

Plantwide overhead rate   = $ 4.62

2)

Total Cost per unit of Extra Fine           = Plantwide overhead rate + Direct materials and Labor Cost           =   $ 4.62 + $ 9           =    $ 13.62

Total Cost per unit of Extra Fine = $ 13.62

Total Cost per unit of Family Style           = Plantwide overhead rate + Direct materials and Labor Cost           =   $ 4.62 + $ 8           =    $ 12.62

Total Cost per unit of Family Style = $ 12.62

3a)

Gross profit per Case for Extra Fine           = Market Price per Unit (-) Cost per unit            =   $ 18 (-) $ 13.62            = $ 4.38

Gross profit per Case for Extra Fine   = $ 4.38

Gross profit per Case for   Family Style           = Market Price per Unit (-) Cost per unit            =   $ 12 (-) $ 13.62            =   ($1.62)

Gross Loss per Case for   Family Style   = ($ 1.62 )

3b)

Eliminate Family Style since it results in Loss of $ 1.62