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	$	4,500		Machine hours	1,500
	Cooking		11,250		Machine hours	1,500
	Product testing		112,500		Batches	600
		$	128,250
Department 2	Machine calibration	$	250,000		Production runs	400
	Labeling		12,000		Cases of output	120,000
	Defects		6,000		Cases of output	120,000
		$	268,000
Support	Recipe formulation	$	90,000		Focus groups	45
	Heat, lights, and water		27,000		Machine hours	1,500
	Materials handling		65,000		Container types	8
		$	182,000

Additional production information about its two product lines follows.

Extra Fine		Family Style
Units produced	20,000	cases	100,000	cases
Batches	200	batches	400	batches
Machine hours	500	MH	1,000	MH
Focus groups	30	groups	15	groups
Container types	5	containers	3	containers
Production runs	200	runs	200	runs

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 $6 per case of Extra Fine and $5 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 $9 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

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.

Plantwide overhead rate $4.82 per case

(Total Overhead/Units Produced)

($128250+$268000+$182000) / (20000+100000)

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 $6 per case of Extra Fine and $5 per case of Family Style.

Total cost per unit Extra Fine $10.82 unit Family Style $9.82 unit

Direct Material & Direct Labor cost + Overhead per case

Extra Fine = $4.82 + $6
Family Style = $4.82 + $5

3.a. 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.

Extra Fine Profit $7.18 Family Style Loss $(0.82)

Market Price – Cost per unit

Extra Fine = $18 - $10.82
Family Style = $9 - $9.82

3.b. What might management conclude about the Family Style Salsa product line?

Extra Fine should provide good profit but Family style provide huge loss.

Hence eliminate Family style.