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	$	5,300		Machine hours	1,700
	Cooking		10,000		Machine hours	1,700
	Product testing		113,300		Batches	550
		$	128,600
Department 2	Machine calibration	$	290,000		Production runs	800
	Labeling		16,000		Cases of output	130,000
	Defects		10,000		Cases of output	130,000
		$	316,000
Support	Recipe formulation	$	98,000		Focus groups	50
	Heat, lights, and water		34,000		Machine hours	1,700
	Materials handling		73,000		Container types	10
		$	205,000

Additional production information about its two product lines follows.

	Extra Fine		Family Style
Units produced	28,000	cases	102,000	cases
Batches	280	batches	270	batches
Machine hours	650	MH	1,050	MH
Focus groups	20	groups	30	groups
Container types	7	containers	3	containers
Production runs	280	runs	520	runs

rev: 06_09_2018_QC_CS-128873

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 $4 per case of Extra Fine and $3 per case of Family Style.
3.a. If the market price of Extra Fine Salsa is $13 per case and the market price of Family Style Salsa is $7 per case, determine the gross profit per case for each product.
3.b. What might management conclude about the Family Style Salsa product line?
4. Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is $4 per case of Extra Fine and $3 per case of Family Style. (Round your intermediate calculations to 2 decimal places. Round "Activity Rate" and "Overhead cost per unit" answers to 2 decimal places.)
5. If the market price is $13 per case of Extra Fine and $7 per case of Family Style, determine the gross profit per case for each product. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Ans- Plant-wide overhead rate per unit:

Overheads in Department 1	$128,600
Overheads in Department 2	316,000
Overheads in Support	205,000
Total Overheads		$649,600
Units produced in Extra-Fine	28,000
Units produced in Family Style	102,000
Total units produced		130,000
Plant wide overhead rate per unit (per case) ($649,400/130,000)		$5.00

2-Total cost per unit using plant wide overhead rate:

Cost	Extra-Fine	Family -Style
Direct materials and direct labor cost	$4.00	$3.00
Overhead costs (as computed above)	$5.00	$5.00
Total cost unit (per Case)	$9.00	$8.00

3-Gross profit per unit using plant wide overhead rate:

Costs	Extra-Fine	Family-Style
Market price per unit	$13.00	$7.00
Less: Total cost per unit (as computed above)	($9.00)	($8.00)
Gross profit per unit (per case)	$4.00 (Profit)	($1) (Loss)

3-b-Management conclusion about the Family Style Salsa Product Line:

Management may eliminate Family Style Salsa product line because it incurrs loss.

4-Total Cost per unit using ABC overhead rate:

Costs	Extra -Fine	Family-Style
Direct materials and Direct labor cost	$4.00	$3.00
Overhead costs	$9.78	$3.68
Total cost unit (per case)	$13.78	$6.68

Working Note:

Calculation of cost per unit each type of business:

					Extra-Fine		Family -Style
Activity	Overhead cost O		Activity driver A	Activity Rate R=O/A	Activity driver D	Overhead Assigned D*R	Activity driver E	Overhead Assigned E*R
mixing and cooking	15,300	Machine hours	1,700	9	650	5,850	1,050	9,450
Product testing	113,300	Batches	550	206	280	57,680	270	55,620
Machine calibration	290,000	Production runs	800	363	280	101,500	520	188,500
Labeling & Defects	26,000	Cases of output	130,000	.20	28,000	5,600	102,000	20,400
Recipe formulation	98,000	Focus groups	50	1,960	20	39,200	30	58,800
Heat,Lights and Water	34,000	Machine hours	1,700	20	650	13,000	1,050	21,000
Materials handling	73,000	Container types	10	7,300	7	51,100	3	21,900
Total	649,600					273,930		375,670

Total units produced-

Extra-Fine-28,000

Family -Style-102,000

Overhead cost per unit= Total overhead cost assigned/ total units produced

Extra- Fine=273,930/28,000=$9.78

Family-Style=375,670/102,000=$3.68

5- Gross profit per case if the market price is $13 per case of Extra Fine and $7 per case of Family Style:

Gross profit=Market price -Total cost(per unit)

Extra Fine - $13-$13.78=($.78) Loss

Family Style$7-$6.68= $.32 Profit