Question

Problem 17-5A Pricing analysis with ABC and a plantwide overhead rate LO A1, A2, P1, P3 [The following information applies to the questions displayed below.) 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 Driver Machine hours Machine hours Batches Quantity 1,500 1,500 600 Department 2 Machine calibration Labeling Defects Overhead cost $ 4,500 11,250 112,500 $ 128, 250 $ 250,000 12,000 6,000 $ 268,000 $ 90,000 27,000 65,000 $ 182,000 Production runs Cases of output Cases of output 400 120,000 120,000 Support Recipe formulation Heat, lights, and water Materials handling Focus groups Machine hours Container types 45 1,500 8

Answer 1

1 Plantwide Overhead rate $ 4.82 Per case Overhead Cost Number of cases 578,250 $ 120000 Working Overhead cost calculation Department 1 $ Department 2 $ Support $ Total Overhead cost $ 128,250 268,000 182,000 578,250 Number of cases Extra Fine Family Style Total Machine hours 20000 100000 120000 Divide overhead cost with number of cases to get plantwide overhead rate. Number of cases are given in question and overhead cost is calculated above. 2 Total cost per unit Total manufacturing Cost Per unit Extra Fine Family Style 5.00 Material and Labor Overhead Cost Total manufacturing cost $ $ 6.00 4.82 S $ Add 4.82 $ 10.82 $ 9.82 Add material, labour and overhead cost to calculate total manufacturing cost. 3.a. Profit and loss for each model Extra Fine Family Style Less Market Price Manufacturing Cost per unit Gross Profit (loss) per unit $ $ $ 18.00 $ 10.82 $ 7.18$ 9.00 9.82 (0.82) calculate profit / loss by substracting manufacturing cost from market price. Family style product line is making losses the company can either reduce the cost of the product or the company can eliminate the product line. If reducing cost is not possible the company should Eliminate Family style product line. Other factors will be considered before making any decision. 3.b.