This Website Has Been Moved to a New Link


Benton Corporation produces two grades

Price: $2.50

Benton Corporation produces two grades of wine from grapes that it buys from
California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost,
high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Benton also produces
and sells roughly 300,000 liters per year of a low-volume, high-cost product called
LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has
not been as profitable as LiteMist. Management is considering dropping the inexpensive
CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product
already demands considerably more attention than the CoolDay line.

Jack Eller, president and founder of Benton, is skeptical about this idea. He points out
that for many decades the company produced only the CoolDay line and that it was
always quite profitable. It wasn’t until the company started producing the more complicated
LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of
LiteMist, the company had simple equipment, simple growing and production procedures,
and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it
requires considerably more time and effort, both to bottle and to label and box than does
CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell
the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires
1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist
requires such maintenance every 600 liters.

Jack has asked the accounting department to prepare an analysis of the cost per liter
using the traditional costing approach and using activity-based costing. The following
information was collected.

Answer each of the following questions. (Round all calculations to three decimal places.)
(a) Under traditional product costing using direct labor hours, compute the total manufacturing
cost per liter of both products
(b) Under ABC, prepare a schedule showing the computation of the activity-based overhead
rates (per cost driver).
(c) Prepare a schedule assigning each activity’s overhead cost pool to each product, based
on the use of cost drivers. Include a computation of overhead cost per liter.
(d) Compute the total manufacturing cost per liter for both products under ABC.

No comments:

Post a Comment