Benton Corporation produces two grades of non-alcoholic wine from grapes that it

Question

Benton 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. Benton also produces and sells 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 Benton, 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 wasn't 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 using the traditional costing approach and using activity-based costing. The following information was collected Direct materials per liter Direct labor cost per liter Direct labor hours per liter Total direct labor hours CoolDay LiteMist $1.20 0.90 0.07 21,000 $0.40 $0.50 0.06 180,000 Expected Use of Cost Drivers per Product Expected Use of Activity Cost Pools Cost Drivers Estimated Overhead Cost Drivers CoolDay LiteMist Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment Cart of grapes Total months Number of bottles Number of bottles Number of inspections $146,883 719,400 296,100 223,200 241,600 $1,627,183 6,600 6,000 600 6,600,000 3,000,000 3,600,000 900,000 900,000 800 600,000 600,000 350 300,000 300,000 450

Explanation / Answer

overhead allocated CoolDay 1,627,183/201,000*180,000= 1457179 overhead per litre = 1457179/3,000,000= 0.486 LiteMist 1,627,183/201,000*21000 170004 overhead per liter 170,004/300,000= 0.567 CoolDay LiteMist Direct materials per ltr 0.4 1.2 Direct labor cost per liter 0.5 0.9 overhead rate per liter 0.486 0.567 manufacturing cost per liter 1.386 2.667

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