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Question

Required information

[The following information applies to the questions displayed below.]

Sara’s Salsa Company produces its condiments in two types: Extra Fine for restaurant customers and Family Style for home use. Salsa is prepared in department 1 and packaged in department 2. The activities, overhead costs, and drivers associated with these two manufacturing processes and the company’s production support activities follow.

Additional production information about its two product lines follows.

Required:
1. Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa.
2. Using the plantwide overhead rate, determine the total cost per case for the two products if the direct materials and direct labor cost is $9 per case of Extra Fine and $6 per case of Family Style.
3.a. If the market price of Extra Fine Salsa is $18 per case and the market price of Family Style Salsa is $10 per case, determine the gross profit per case for each product.
3.b. What might management conclude about the Family Style Salsa product line?

Process Activity Overhead cost Driver Quantity Department 1 Mixing $ 5,100 Machine hours 1,500 Cooking 10,800 Machine hours 1,500 Product testing 113,100 Batches 1,000 $ 129,000 Department 2 Machine calibration $ 280,000 Production runs 700 Labeling 10,000 Cases of output 145,000 Defects 4,500 Cases of output 145,000 $ 294,500 Support Recipe formulation $ 96,000 Focus groups 75 Heat, lights, and water 33,000 Machine hours 1,500 Materials handling 71,000 Container types 8 $ 200,000

Explanation / Answer

Answer 1.

Answer 2

Answer 3

Calculating gross profit per case for each product:

Answer 4.

Even though profit per case of Family style is much lesser than that of extra fine case, its contribution to total profit is more than extra fine because units sold under the product line family style is way higher than extra fine.

Total Overhead Cost          2,00,000 Total No. of Cases          1,45,000 Plantwide Overhead rate per Case                  1.38

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