Sunland Corporation produces two grades of non-alcoholic 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. Sunland also produces 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 Sunland, 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 was not 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 basic 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.
CoolDay LiteMist
Direct materials per liter Direct labor cost per liter
$0.40 $1.20 $0.50 $0.90 $0.07 $0.07 $210,000 $21,000
Direct labor hours per liter
Total direct labor hours
Estimated Overhead
Estimated Use of Cost Drivers
Activity Cost Pools
Cost Drivers
CoolDay LiteMist 6,000 600 3,000,000 300,000 600,000 300,000 600,000 300,000
Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment
Cost of grapes Total months Number of bottles Number of bottles
$151,140 $468,600 $308,700 $200,700
6,600 6,600,000 900,000 900,000
Number of inspections
243,200
800
350
450
$1,372,340
(b)
Under ABC, prepare a schedule showing the costs to 3 decimal places, e.g. 12.250
Activity Cost Pools
Estimated overhead
Estimated Use of Cost Drivers
Activity-Based Overhead Rates
Grape processing
Aging
Bottling and corking Labeling and boxing Maintain and inspect equipment
per bottle
per bottle
per inspection
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