Vorma Vorma manufactures two proprietary all-natural fruit antioxidant food add...

Vorma

Vorma manufactures two proprietary all-natural fruit antioxidant food additives that are approved by the U.S. Food and Drug Administration. One is for liquid vitamins (LiqVita) and the other is used by dry cereal producers (Dry). Both of these products are sold only in the United States, and although they both share common chemistry and manufacturing, their end markets are completely separated. Both are produced in the same plant and share common manufacturing processes, such as purchasing, quality control, human resources, and so forth. These common fixed overhead costs amount to $1,500,000 per month. Each product also has its own directly traceable fixed costs, such as dedicated equipment leases used only by one of the two products, dedicated product engineers, and so forth. The following table summarizes the operations of Vorma for a typical month.

Again, the “Own fixed costs” consist of all fixed costs that can be traced directly to one of the two products (LiqVita and Dry), and these costs do not vary with the number of units produced.

Required:

a. Prepare a typical monthly income statement for LiqVita and Dry after allocating the common fixed overhead costs of $1,500,000 per month to the two product lines based on the relative proportions of total variable costs generated by each product.

b. Which of the two products in part (a) is the most profitable and which is the least profitable? (Note: You are not being asked to analyze or explain the relative profitablities of LiqVita and Dry.)

c. Vorma is planning to introduce a tablet version of its vitamin into China, with a selling price of $9 and a variable cost per unit of $7. At a price of $9, Vorma managers believe they will sell 950,000 units per month in China. Introducing the new product (called China) will require additional “Own fixed costs” (just for China) of $800,000. As in part (a), prepare monthly income statements, computing the monthly net income for the three products (LiqVita, Dry, and China). Allocate the common fixed overhead of $1,500,000 based on the relative proportions of total variable costs generated by each product.

d. As in part (b), list the order of the most profitable to least profitable products. Do not do any analysis. e. Compare the relative profitability of the two products (LiqVita and Dry) before introducing China [part (b)] and after introducing China [part (d)]. Analyze and discuss why the relative profitability of the two preexisting products (LiqVita and Dry) does or does not change with the introduction of the new product (China).