Question

Mercia Chocolates produces gourmet chocolate products with no preservatives. Any production must be sold within a few days, so producing for inventory is not an option. Mercia’s single plant has the capacity to make 91,500 packages of chocolate annually. Currently, Mercia sells to only two customers: Vern’s Chocolates (a specialty candy store chain) and Mega Stores (a chain of department stores). Vern’s orders 48,300 packages and Mega Stores orders 16,500 packages annually. Variable manufacturing costs are $13 per package, and annual fixed manufacturing costs are $522,000. The gourmet chocolate business has two seasons, holidays and non-holidays. The holiday season lasts exactly four months and the non-holiday season lasts eight months. Vern’s orders the same amount each month, so Vern’s orders 15,900 packages during the holidays and 32,400 packages in the non-holiday season. Mega Stores only carries Mercia’s chocolates during the holidays. Required: a. Calculate the product cost for each season with excess capacity costs assigned to season in which it is incurred. b. Calculate the product cost for each season with excess capacity costs assigned to the season requiring it.

Answer 1

	Vern	Mega	Total
Holiday (4 months)	15900	16500	32400
Non-holiday (8 months)	32400		32400
	48300	16500	64800

a. product cost for each season with excess capacity costs assigned to season in which it is incurred.

	Holiday	Non-holiday
Production (units)	32400	32400
Variable cost at 13	421200	421200
Fixed cost per month (522,000/12)	43000	43000
No. of months	4	8
Total fixed cost	172000	344000
Total cost	593200	765200
Production cost per unit	18.31	23.62

b. product cost for each season with excess capacity costs assigned to the season requiring it.

	Holiday	Non-holiday
Production (units)	32400	32400
Variable cost at 13	421200	421200
Fixed cost	{522000/(32400+32400)}*32400
	259200	259200
Total cost	680400	680400
Production cost per unit	21	21