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 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 carries Mercia’s chocolates during the holidays.

Calculate the product cost for each season with excess capacity costs assigned to the season requiring it. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Mercia Chocolates
Annual capacity	95,500.00
Sales in holidays
To Vern's	18,300.00
To mega	20,500.00
Sales in holidays	38,800.00
Months in holidays	4.00
Equivalent monthly sales	9,700.00
Sales in Non holidays
To Vern's	38,800.00
Sales in Non holidays	38,800.00
Months in Non holidays	8.00
Equivalent monthly sales	4,850.00
So fixed cost will be allocated in the ratio of Equivalent monthly sales in holidays and Equivalent monthly sales in non holidays.
So $ 570,000 will be allocated in the ratio of 9700:4850
Calculations are below	Holidays	Non Holidays	Total
Equivalent monthly sales	9,700.00	4,850.00	14,550.00
Allocation of $ 570,000.	380,000.00	190,000.00	570,000.00
Number of units sold	38,800.00	38,800.00
Fixed Cost per unit	9.79	4.90
Variable cost per unit	21.00	21.00
Product cost per unit	30.79	25.90	(4.90)
So,
Product cost for Holiday season is $ 30.79 per unit.
Product cost for Non Holiday season is $ 25.90 per unit.