Question

Mercia Chocolates produces gourmet chocolate products with no preservatives. Any production must be sold within a few days, so producing inventory is not an option. Mercia's single plant has the capacity to make 95,500 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 57,100 packages and Mega Stores orders 20,500 packages annually. Variable manufacturing costs are $21 per package, and annual fixed manufacturing costs are $570,000.

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 18,300 packages during the holidays and 38,800 packages in the non-holiday season. Mega Stores only carried Mercia's chocolates during the holidays.

Required:

a) Calculate the product cost per package for each season(holiday and non holiday) with excess capacity costs assigned to season in which it is incurred.

b) Calculate the product cost per package for each season(non holiday and holiday) with excess capacity costs assigned to the season requiring it.

Answer 1

a .

	Product Cost
Non ­holiday	$30.79
Holiday	$25.90

b.

	Product Cost
Non ­holiday	$25.90
Holiday	$30.79

Explanation :

Fixed manufacturing costs per month = $570,000 / 12 months = $47,500.

Fixed manufacturing costs in holidays = $47,500 * 4 months = $190,000

Fixed manufacturing costs in non holidays = $47,500 * 8 months = $380,000

Total packages during holidays = 18,300 packages (Vern's ) + 20,500 packages (Mega) = 38,800 packages

Total packages during non holidays = 38,800 packages (Vern's ) + 0 = 38,800 packages.

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

Non ­holiday :

Overhead rate = Fixed manufacturing costs in non holidays / Fixed manufacturing costs in non holidays

= $380,000 / 38,800 packages = $9.79

Product Cost = Variable manufacturing costs per pakage + Overhead rate

= $21 + $9.79 = $30.79.

Holiday :

Overhead rate = Fixed manufacturing costs in holidays / Fixed manufacturing costs in holidays

= $190,000 / 38,800 packages = $4.90

Product Cost = Variable manufacturing costs per pakage + Overhead rate

= $21 + $4.90 = $25.90.

b. The product cost for each season with excess capacity costs assigned to season in which it is required.

Total packages during non holidays per month = 38,800 packages / 8 months = 4,850 pakages

Total packages during holidays per month = 38,800 packages / 4 months = 9,700 pakages

Thus, during non holidays only 50 % of plant is idle per month & this 50 % of plant idle per month unused capacity is put to use during holidays.      

Non ­holiday :

Overhead rate = ($380,000 * 50%) / 38,800 packages = $4.90

Product Cost = Variable manufacturing costs per pakage + Overhead rate

= $21 + $4.90 = $25.90.

Holiday :

Overhead rate

= [$190,000 + ($380,000 * 50%) / 38,800 packages = $9.79

Product Cost = Variable manufacturing costs per pakage + Overhead rate

= $21 + $9.79 = $30.79.