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Merando Corporation produces two grades

Price: $2.50

Merando Corporation produces two grades of wine from grapes that it buys from
California growers. It produces and sells roughly 600,000 gallon jugs per year of a low cost,
high-volume product called Valley Fresh. Merando also produces and sells roughly
200,000 gallons per year of a low-volume, high-cost product called Merando Valley.
Merando Valley is sold in 1-liter bottles. Based on recent data, the Valley Fresh product
has not been as profitable as Merando Valley. Management is considering dropping the
inexpensive Valley Fresh line so it can focus more attention on the Merando Valley product.
The Merando Valley product already demands considerably more attention than the Valley
Fresh line.

Frankie Merando, president and founder of Merando, is skeptical about this idea. He
points out that for many decades the company produced only the Valley Fresh line, and
that it was always quite profitable. It wasn’t until the company started producing the more
complicated Merando Valley wine that the profitability of Valley Fresh declined. Prior to
the introduction of Merando Valley, the company had simple equipment, simple growing
and production procedures, and virtually no need for quality control. Because Merando
Valley is bottled in 1-liter bottles, it requires considerably more time and effort, both to
bottle and to label and box, than does Valley Fresh. The company must bottle and handle
4 times as many bottles of Merando Valley to sell the same quantity as Valley Fresh, since
there are approximately 4 liters in a gallon. Valley Fresh requires 1 month of aging;
Merando Valley requires 1 year. Valley Fresh requires cleaning and inspection of equipment
every 2,500 gallons; Merando Valley requires such maintenance every 250 gallons.

Frankie has asked the accounting department to prepare an analysis of the cost per
gallon 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 gallon 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 gallon.
(d) Compute the total manufacturing cost per gallon for both products under ABC.

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