Question

Problem 17-5A Pricing analysis with ABC and a plantwide overhead rate LO A1, A2, P1, P3

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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	$	4,600		Machine hours	2,700
	Cooking		11,600		Machine hours	2,700
	Product testing		114,300		Batches	600
		$	130,500
Department 2	Machine calibration	$	340,000		Production runs	800
	Labeling		20,000		Cases of output	135,000
	Defects		7,000		Cases of output	135,000
		$	367,000
Support	Recipe formulation	$	87,000		Focus groups	75
	Heat, lights, and water		54,000		Machine hours	2,700
	Materials handling		83,000		Container types	8
		$	224,000

Additional production information about its two product lines follows.

	Extra Fine		Family Style
Units produced	38,000	cases	97,000	cases
Batches	380	batches	220	batches
Machine hours	1,150	MH	1,550	MH
Focus groups	64	groups	11	groups
Container types	3	containers	5	containers
Production runs	290	runs	510	runs

Problem 17-5A Part 5

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 $10 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 $13 per case, determine the gross profit per case for each product.
3.b. What might management conclude about the Family Style Salsa product line?

5. If the market price is $18 per case of Extra Fine and $13 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

1)Total cases produced : 38000+97000= 135000

Total overhead : 130500+367000+224000=721500

Predetermined overhead rate :Total overhead /Total cases

                    = : 721500/135000

               = $ 5.34 per case

Overhead assigned to Extra fine salsa : 5.34

overhead assigned to family style : $ 5.34

2)

	Extra Fine	Family style
Direct material and direct labor	10	8
overhead	5.34	5.34
Total cost per case	15.34	13.34

3a)

	Extra Fine	Family style
Revenue	18	13
cost	(15.34)	(13.34)
Gross profit	2.66	(.34)

3b)Family style salsa has a negative gross profit so it should be discontinued considering other factors

5)

	overhead rate	Extra fine	Family style
Mixing	4600/2700=1.7037 MH	1150*1.7037= 1959	1550*1.7037=2641
cooking	11600/2700=4.2963 MH	1150*4.2963 = 4941	1550*4.2963=6659
product testing	114300/600=190.5 BATCH	380*190.5= 72390	220*190.5=41910
machine callibration	340000/800= 425Runs	425*290=123250	425*510=216750
labelling	20000/135000=.14815 cases	38000*.14815=5630	97000*.14815=14371
defects	7000/135000=.05185case	38000*.05185=1970	97000*.05185=5029
Receipe formulation	87000/75=1160 focus groups	1160*64=74240	1160*11=12760
Heat light and water	54000/2700=20 MH	1150*20=23000	1550*20=31000
material handling	83000/8=10375 CT	10375*3=31125	10375*5=51875
Total overhead		338505	382995
cases		38000	97000
overhead per case		338505/38000= 8.91	382995/97000= 3.95

	eXTRA fine	Family style
Sales	18	13
less:direct material and labor	(10	(8)
	(8.91)	(3.95)
Profit	(.91)	1.05