Rockness asked, "Do you see any problems here? Should we drop any of these products?

Should we reprice any of these products?"

He said, "I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products."

Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found:

---------------------------------------------------IMAGE 2-----------------------------------------------------------------

Then, he began a series of interviews with department heads to see how to assign these costs to cost pools. He found that 40 percent of indirect labor was for scheduling or for handling production runs, including purchasing, preparing the production run, releasing materials for the production run, and performing a first-time inspection of the run. Another 50 percent of indirect labor was used to set up machinery to produce a particular product. The remaining 10 percent of indirect labor was spent maintaining records for each of the four products, monitoring the supply of raw materials required for each product, and improving the production processes for each product. This 10 percent of indirect labor was assigned to the cost driver "number of products."

Interviews with people in the information technology department indicated that $10,000 was allocated to the cola bottling line. Eighty percent of this $10,000 information technology cost was for scheduling production runs. Twenty percent of the cost was for recordkeeping for each of the four products. Fringe benefits were 40 percent of labor costs. The rest of the overhead was used to supply machine capacity of 20,000 Hours of productive time. Rocky then found the following cost driver volumes from interviews with production personnel.

Setups: 560 labor-hours for setups.

Production runs: 110 production runs.

Number of products: 4 products,

Machine-hour capacity: 20,000 Hours.

Diet cola used 200 setup hours, 40 production runs, and 5,000 machine-hours to produce 50,000 units. Regular cola used 60 setup hours, 30 production runs, and 4.000 machine-hours to produce 40,000 units. Cherry cola used 240 setup hours, 30 production runs, and 900 machine hours to produce 9,000 units. Grape cola used 60 setup hours, 10 production runs, and 100 machine-hours to produce 1,000 units. Rocky learned that the production people had a difficult time getting the taste just right for the Cherry and Grape colas, so these products required more time per setup than either the Diet or Regular colas.

Required

Compute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.

What is the cost of unused capacity? What do you recommend that Rockness Bottling do with this unused capacity?

Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottling's market, assume that it would use 10,000 hours of machine time to make 100,000 units. (Recall that the machine capacity in this case is 20,000 hours, while Diet, Regular, Cherry, and Grape consume only 10,000 hours.) Vanilla cola's per unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total.

Transcribed Image Text:B Monthly Report on Cola Bottling Line Diet Regular Cherry Grape Total Sales $ 75,000 $ 60,000 $ 13,950 $1,650 $150,600 4 Less: Materials 25,000 20,000 4,680 550 50,230 Direct labor 10,000 8,000 1,800 200 20,000 Fringe benefits on direct labor 4,000 3,200 720 80 8,000 520 52,000 26,000 $ 10,000 20,800 $8,000 4,680 $2,070 Indirect costs (@ 260% of direct labor) Gross margin 24 300 $ 20,370 9. 10 Return on sales (see note [a]) 13.3% 13.3% 14.8% 18.2% 13.5% 11 Volume 50,000 40,000 9,000 1,000 100,000 12 Unit price $4 1.50 $4 1.50 24 1.55 $ 1.65 %24 1.506 13 Unit cost 24 1.30 $4 1.30 %24 1.32 $ 1.35 %24 1.302 14 15 a. Retun on sales before considering selling, general, and administrative expenses. 16
Transcribed Image Text:B $ 20,000 Indirect labor 2 Fringe benefits on indirect labor 8,000 3 Information technology 10,000 4 Machinery depreciation 8,000 Machinery maintenance 4,000 6. Energy 2,000 7. Total $ 52,000 LO

Question

Rockness asked, &#34;Do you see any problems here? Should we drop any of these products?Should we reprice any of these products?&#34;He said, &#34;I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products.&#34;Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found: ---------------------------------------------------IMAGE 2----------------------------------------------------------------- Then, he began a series of interviews with department heads to see how to assign these costs to cost pools. He found that 40 percent of indirect labor was for scheduling or for handling production runs, including purchasing, preparing the production run, releasing materials for the production run, and performing a first-time inspection of the run. Another 50 percent of indirect labor was used to set up machinery to produce a particular product. The remaining 10 percent of indirect labor was spent maintaining records for each of the four products, monitoring the supply of raw materials required for each product, and improving the production processes for each product. This 10 percent of indirect labor was assigned to the cost driver &#34;number of products.&#34;Interviews with people in the information technology department indicated that $10,000 was allocated to the cola bottling line. Eighty percent of this $10,000 information technology cost was for scheduling production runs. Twenty percent of the cost was for recordkeeping for each of the four products. Fringe benefits were 40 percent of labor costs. The rest of the overhead was used to supply machine capacity of 20,000 Hours of productive time. Rocky then found the following cost driver volumes from interviews with production personnel. Setups: 560 labor-hours for setups.Production runs: 110 production runs.Number of products: 4 products,Machine-hour capacity: 20,000 Hours. Diet cola used 200 setup hours, 40 production runs, and 5,000 machine-hours to produce 50,000 units. Regular cola used 60 setup hours, 30 production runs, and 4.000 machine-hours to produce 40,000 units. Cherry cola used 240 setup hours, 30 production runs, and 900 machine hours to produce 9,000 units. Grape cola used 60 setup hours, 10 production runs, and 100 machine-hours to produce 1,000 units. Rocky learned that the production people had a difficult time getting the taste just right for the Cherry and Grape colas, so these products required more time per setup than either the Diet or Regular colas.RequiredCompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.What is the cost of unused capacity? What do you recommend that Rockness Bottling do with this unused capacity?Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottling's market, assume that it would use 10,000 hours of machine time to make 100,000 units. (Recall that the machine capacity in this case is 20,000 hours, while Diet, Regular, Cherry, and Grape consume only 10,000 hours.) Vanilla cola's per unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total. BMonthly Report on Cola Bottling LineDietRegularCherryGrapeTotalSales$ 75,000$ 60,000$ 13,950$1,650$150,6004Less:Materials25,00020,0004,68055050,230Direct labor10,0008,0001,80020020,000Fringe benefits on direct labor4,0003,200720808,00052052,00026,000$ 10,00020,800$8,0004,680$2,070Indirect costs (@ 260% of direct labor)Gross margin24300$ 20,3709.10Return on sales (see note [a])13.3%13.3%14.8%18.2%13.5%11 Volume50,00040,0009,0001,000100,00012 Unit price$41.50$41.50241.55$ 1.65%241.50613 Unit cost241.30$41.30%241.32$ 1.35%241.3021415 a. Retun on sales before considering selling, general, and administrative expenses.16 B$ 20,000Indirect labor2Fringe benefits on indirect labor8,0003Information technology10,0004Machinery depreciation8,000Machinery maintenance4,0006.Energy2,0007.Total$ 52,000LO

Accepted Answer

Financial statements are a part of reporting and displaying the financial activities and position of…