Question

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	$	5,300		Machine hours	1,700
	Cooking		10,000		Machine hours	1,700
	Product testing		113,300		Batches	550
		$	128,600
Department 2	Machine calibration	$	290,000		Production runs	800
	Labeling		16,000		Cases of output	130,000
	Defects		10,000		Cases of output	130,000
		$	316,000
Support	Recipe formulation	$	98,000		Focus groups	50
	Heat, lights, and water		34,000		Machine hours	1,700
	Materials handling		73,000		Container types	10
		$	205,000

Additional production information about its two product lines follows.

	Extra Fine		Family Style
Units produced	28,000	cases	102,000	cases
Batches	280	batches	270	batches
Machine hours	650	MH	1,050	MH
Focus groups	20	groups	30	groups
Container types	7	containers	3	containers
Production runs	280	runs	520	runs

rev: 06_09_2018_QC_CS-128873

Required:
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 $4 per case of Extra Fine and $3 per case of Family Style.
3.a. If the market price of Extra Fine Salsa is $13 per case and the market price of Family Style Salsa is $7 per case, determine the gross profit per case for each product.
3.b. What might management conclude about the Family Style Salsa product line?

Answer 1

ANSWER

1)

Total overhead cost = 128,600+316,000+205,000=649,600

Total cases = 28,000+102,000=130,000

overhead cost per caset =Total overhead /total case

                                     = 649,600/ 130,000

                                      = $ 4.99 per case

2)

Extra cost = 4 +4.99 = 8.99 per case

Family = 3+4.99 = 7.99 per case

3.a)

Gross profit for extra =Price -cost

                                  = 13 - 8.99 = 4.01 per case

For family = 7 -7.99 = - .99 per case

3.b)

The management should eliminate family style as it results in negative gross profit of $ -.99 per case

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