Sara\'s Salsa Company produces its condiments in two types: Extra Fine for resta

Question

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 Activity Overhead cost Driver $ 4,700 Machine hours Machine hours Quantity 2,800 2,800 650 ProcesS Department 1 Mixing Cooking Product testing 15,600 114,400 $ 134,700 Batches Department 2 Machine calibration Labeling Defects $ 345,000 Production runs Cases of output Cases of output 750 180,000 180,000 18,000 9,000 $ 372,000 $ 88,000 42,000 84,000 $ 214,000 Recipe formulation Heat, lights, and water Materials handling Support Focus groups Machine hours Container types 40 2,800 Additional production information about its two product lines follows. Extra Fine Family Style Units produced Batches Machine hours Focus groups Container types Production runs 39,000 cases 141,00e cases 390 batches 1,200 MH 260 batches 1,600 MH 30 groups 10 groups 4 containers 300 runs 4 containers 450 runs

Explanation / Answer

1) Total Overhead cost = Department 1 OH+Department 2 OH+Support Cost

= $134,700+$372,000+$214,000 = $720,700

Total Cases produced = 39,000 cases+141,000 cases = 180,000 cases

Predetermined Overhead rate = Total Overhead cost/Total cases produced

= $720,700/180,000 cases = $4.00

2) Calculation of cost per unit (Amounts in $)

3a) Calculation of gross profit per case (Amounts in $)

3b) It appears that family style salsa is not profitable and the company may be inclined to stop producing this product if the costs cannot be reduced (or price cannot be increased) to a profitable level.

Particulars Extra Fine Family Style Direct Materials and direct labor cost 8 9 Overhead cost per case 4 4 Total cost per unit 12 13

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