Problem 4-5A Sara\'s Salsa Company produces its condiments in two types: Extra F
ID: 2423738 • Letter: P
Question
Problem 4-5A
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 its production support activities follow. Additional production information about its two product lines follows. 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. Using the plantwide overhead rate, determine the total cost per unit for the two products if the direct materials and direct labor cost is 6 per case of Extra Fine and 5 per case of Family Style. If the market price of Extra Fine Salsa is 18 per case and the market price of Family Style Salsa is 9 per case, determine the gross profit per case for each product. What might management conclude about each product line? Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is 6 per case of Extra Fine and 5 per case of Family Style. If the market price is 18 per case of Extra Fine and 9 per case of Family Style, determine the gross profit per case for each product. How should management interpret the market prices given your computations? Would your pricing analysis be improved if the company used departmental rates based on machine hours in department 1 and number of cases in department 2, instead of ABC? Explain.Explanation / Answer
1. Compute the overhead cost per each case of Extra fine and family style salsa:
Overhead cost per case = Overhead cost / number of cases
= ($128,250+$268,000+$182,000)/ (100,000 cases + 20,000 cases)
= $4.82 per case
Therefore, overhead cost of $4.82 per case is used for both extra fine and family style salsa.
2. Determine the total cost per unit of each product:
Particulars
Extra fine
Family style
Material
$ 6.00
$ -
Direct labor
$ -
$ 5.00
Overhead rate
$ 4.82
$ 4.82
Total cost per unit
$ 10.82
$ 9.82
3.
Particulars
Extra fine
Family style
Market price
$ 18.00
$ 9.00
Total cost per unit
$ 10.82
$ 9.82
Gross profit (or loss) per case
$ 7.18
$ (0.82)
Based on the above analysis, company is no longer interested in continuing family style salsa product line as it generates loss.
4. Compute the total cost per case of each product using ABC:
Particulars
Extra fine
Family style
Material
$ 6.00
$ -
Direct labor
$ -
$ 5.00
Overhead rate Note -1
$ 14.02
$ 2.98
Total cost per unit
$ 20.02
$ 7.98
Note -1:
Details
EF
FS
Batches
$ 187.50
200
$ 37,500
400
$ 75,000
Machine hrs - Mixing
$ 3.00
500
$ 1,500
1000
$ 3,000
Machine hrs - Cooking
$ 7.50
500
$ 3,750
1000
$ 7,500
Focus groups
$ 2,000.00
30
$ 60,000
15
$ 30,000
Container types
$ 8,125.00
5
$ 40,625
3
$ 24,375
Production runs
$ 625.00
200
$ 125,000
200
$ 125,000
Cases of output - Labeling
$ 0.10
20000
$ 2,000
100000
$ 10,000
Cases of output - Defects
$ 0.05
20000
$ 1,000
100000
$ 5,000
Machine hrs - Heat, Light, Water
$ 18.00
500
$ 9,000
1000
$ 18,000
Total cost
$ 280,375
$ 297,875
Number of units
20000
100000
Over head Cost per unit
$ 14.02
$ 2.98
5. Compute Gross profit per case of each product by using ABC:
Particulars
Extra fine
Family style
Market price
$ 18.00
$ 9.00
Total cost per unit
$ 20.02
$ 7.98
Gross profit (or loss) per case
$ (2.02)
$ 1.02
Based on the ABC concept extra fine faces loss of $2.02 and family style faces profit of $1.02 per unit. Therefore, management must increase the price extra fine to be sold in the market. The price of the extra fine must be more than $20.02 per unit.
6. If Machine hours and number of cases are used in department-1 and department -2 respectively, overhead cost per unit varies for extra fine and family style due to the change of overhead cost driver. Based on the usage of cost driver overhead cost per unit of both the products vary on direct proportion.
Particulars
Extra fine
Family style
Material
$ 6.00
$ -
Direct labor
$ -
$ 5.00
Overhead rate
$ 4.82
$ 4.82
Total cost per unit
$ 10.82
$ 9.82
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