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 97,000 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 60,400 packages and Mega Stores orders 22,000 packages annually. Variable manufacturing costs are $24 per package, and annual fixed manufacturing costs are $627,000.

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 19,200 packages during the holidays and 41,200 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.

Require A

Product cost

Non-holiday ??? per package

Holiday ??? per package

Require B

Product cost

Non-holiday ???? per package

Holiday ????   per package

Answer 1

Mercia Chocolates
Answer a
Annual capacity	97,000.00
Sales in holidays
To Vern's	19,200.00
To Mega	22,000.00
Sales in holidays	41,200.00
Months in holidays	4.00
Sales in Non holidays
To Vern's	41,200.00
Sales in Non holidays	41,200.00
Months in Non holidays	8.00
So fixed cost will be allocated in the ratio of months in holidays and non holidays.
Calculations are below	Holidays	Non Holidays	Total
Number of months	4.00	8.00	12.00
Allocation of $ 627,000.	209,000.00	418,000.00	627,000.00
Number of units sold	41,200.00	41,200.00
Fixed Cost per unit	5.07	10.15
Variable cost per unit	24.00	24.00
Product cost per unit	29.07	34.15
So,
Product cost for Holiday season is $ 29.07 per unit.
Product cost for Non Holiday season is $ 34.15 per unit.
Answer b
Annual capacity	97,000.00
Sales in holidays
To Vern's	19,200.00
To mega	22,000.00
Sales in holidays	41,200.00
Months in holidays	4.00
Equivalent monthly sales	10,300.00
Sales in Non holidays
To Vern's	41,200.00
Sales in Non holidays	41,200.00
Months in Non holidays	8.00
Equivalent monthly sales	5,150.00
So fixed cost will be allocated in the ratio of Equivalent monthly sales in holidays and Equivalent monthly sales in non holidays.
So $ 627,000 will be allocated in the ratio of 10300:5150
Calculations are below	Holidays	Non Holidays	Total
Equivalent monthly sales	10,300.00	5,150.00	15,450.00
Allocation of $ 627,000.	418,000.00	209,000.00	627,000.00
Number of units sold	41,200.00	41,200.00
Fixed Cost per unit	10.15	5.07
Variable cost per unit	24.00	24.00
Product cost per unit	34.15	29.07
So,
Product cost for Holiday season is $ 34.15 per unit.
Product cost for Non Holiday season is $ 29.07 per unit.