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 Department 1 Activity Mixing Cooking Product testing Quantity 2,200 2,200 1,000 Department 2 Machine calibration Labeling Defects Overhead cost Driver $ 5,800 Machine hours 12.900 Machine hours 113,800 Batches $ 132,500 $315,000 Production runs 20,000 Cases of output 9,000 Cases of output $344,000 S2,000 Focus groups 33,000 Machine hours 79.000 Container types $ 193,000 500 145,000 145,000 Support Recipe formulation Heat, lights, and water Materials handling 2,200 Additional production information about its two product lines follows. Units produced Batches Machine hours Focus groups Container types Production runs Extra Fine 33,000 cases 330 batches 900 M 30 groups 6 containers 240 runs Family Style 112,000 cases 670 batches 1,300 MB 10 groups 2 containers 260 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 $9 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 $12 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 $12 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. Overhead cost per case based on plantwide overhead rate = Total overhead cost/Number of cases = ($132500 + $344000 + $193000)/145000 = $669500/145000 = $4.62 per case

2.

	Extra Fine	Family Style
Direct materials and Direct labor	$                  9.00	$             8.00
Overheads	4.62	4.62
Total cost per unit	$                13.62	$          12.62

3.a.

	Extra Fine	Family Style
Market price per case	$                18.00	$          12.00
Product cost per case	13.62	12.62
Gross profit per case $	$                  4.38	$           -0.62

3.b. Management might conclude that the Extra Fine Salsa product line is profitable while the Family Style Salsa product line is unprofitable.

4.

						Extra Fine		Family Style
Activity	Overhead Cost	Activity Drivers		Activity Rate		Activity Drivers	Overhead assigned	Activity Drivers	Overhead assigned
Mixing & Cooking ($5800 + $12900)	18700	2200	machine hours	8.50	per machine hour	900	7650	1300	11050
Product testing	113800	1000	batches	113.80	per batches	330	37554	670	76246
Machine calibration	315000	500	production runs	630.00	per production run	240	151200	260	163800
Labeling & Defects ($20000 + $9000)	29000	145000	cases	0.20	per case	33000	6600	112000	22400
Recipe formulation	82000	40	focus groups	2050.00	per focus group	30	61500	10	20500
Heat, light and water	33000	2200	machine hours	15.00	per machine hour	900	13500	1300	19500
Material handling	78000	8	container types	9750.00	per container type	6	58500	2	19500
Total	669500						336504		332996
Units produced							33000		112000
Overhead cost per case $							10.20		2.97

	Extra Fine	Family Style
Direct materials and Direct labor	$                  9.00	$             8.00
Overheads	10.2	2.97
Total cost per unit $	$                19.20	$          10.97

5.

	Extra Fine	Family Style
Market price per case	$                18.00	$          12.00
Cost per case	19.20	10.97
Gross profit per case	$                 -1.20	$             1.03