Question

Bright Day Company produces two beverages, Hi-Voltage and EasySlim. Data about these products follow.

Hi-Voltage EasySlim

Production volume ………………… 12,500 bottles 180,000 bottles

Liquid materials ……………………. 1,400 gallons 37,000 gallons

Dry materials ……………………….. 620 pounds 12,000 pounds

Bottles ………………………………. 12,500 bottles 180,000 bottles

Labels ……………………………….. 3 labels per bottle 1 label per bottle

Machine setups ……………………. 500 setups 300 setups

Machine hours ……………………... 200 MH 3,750 MH

Additional data from its two production departments follow.

Department Driver Cost

Mixing department

Liquid materials ……………………. Gallons \( 2,304

Dry materials ……………………….. Pounds 6,941

Utilities ……………………………… Machine hours 1,422

Bottling department

Bottles ………………………………. Units \)77,000

Labeling …………………………….. Labels per bottle 6,525

Machine setup …………………….. Setups 20,000

Required

1. Determine the cost of each product line using ABC.

2. What is the cost per bottle of Hi-Voltage? What is the cost per bottle of EasySlim? (Hint:Your answer should draw on the total cost for each product line computed in requirement 1.)

3. If Hi-Voltage sells for $3.75 per bottle, how much profit does the company earn per bottle of Hi- Voltage that it sells?

4. What is the minimum price that the company should set per bottle of EasySlim? Explain.

Short answer

Cost per unit for Hi-voltage product = $1.83

Cost per unit for EasySlim product = $0.51

Step-by-step solution

Meaning of Activity Based Costing

Activity-based costing is an accounting technique that allocates the overhead costs to the activities instead of the products or services.

Calculation of requirement 1

Computation of total cost of Hi-voltage products

$\begin{array}{rcl}\mathbf{Liquid}\mathbf{}\mathbf{Material}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Gallons}}\mathbf{\times }\mathbf{Gallons}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{304}}{\mathbf{1400}\mathbf{+}\mathbf{37000}}\mathbf{\times }\mathbf{1400}\\ & \mathbf{=}& \mathbf{\$}\mathbf{84}\end{array}$

$\begin{array}{rcl}\mathbf{Dry}\mathbf{}\mathbf{Material}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Pounds}}\mathbf{\times }\mathbf{ponds}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{941}}{\mathbf{620}\mathbf{+}\mathbf{12000}}\mathbf{\times }\mathbf{620}\\ & \mathbf{=}& \mathbf{\$}\mathbf{341}\end{array}$

$\begin{array}{rcl}\mathbf{Utility}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Machine}\mathbf{}\mathbf{Hour}}\mathbf{\times }\mathbf{Machine}\mathbf{}\mathbf{hour}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{422}}{\mathbf{200}\mathbf{+}\mathbf{3750}}\mathbf{\times }\mathbf{200}\\ & \mathbf{=}& \mathbf{\$}\mathbf{72}\end{array}$

$\begin{array}{rcl}\mathbf{Bottle}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Units}}\mathbf{\times }\mathbf{Units}\mathbf{}\mathbf{produced}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{77}\mathbf{,}\mathbf{000}}{\mathbf{12}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{180}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{12}\mathbf{,}\mathbf{500}\\ & \mathbf{=}& \mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{rcl}\mathbf{Labeling}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Labels}}\mathbf{\times }\mathbf{Labels}\mathbf{}\mathbf{used}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{525}}{\mathbf{3}\mathbf{+}\mathbf{1}}\mathbf{\times }\mathbf{3}\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{893}\mathbf{.}\mathbf{75}\end{array}$

$\begin{array}{rcl}\mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{No}\mathbf{.}\mathbf{}\mathbf{of}\mathbf{}\mathbf{setups}}\mathbf{\times }\mathbf{Setups}\mathbf{}\mathbf{used}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}}{\mathbf{500}\mathbf{+}\mathbf{300}}\mathbf{\times }\mathbf{500}\\ & \mathbf{=}& \mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{500}\end{array}$

_{Total cost for Hi-voltage products = Total Mixing department cost for product line + Total Bottling department}

_{cost for product line}

_{= $84 + $341 + $72 + $5,000 + $4,893.75 + $12,500}

_{= $22,890.75}

_{Computation of total cost for EasySlim products}

_{$\begin{array}{rcl}\mathbf{Liquid}\mathbf{}\mathbf{Material}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Gallons}}\mathbf{\times }\mathbf{Gallons}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{304}\mathbf{}}{\mathbf{1400}\mathbf{+}\mathbf{37000}}\mathbf{\times }\mathbf{37000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{220}\\ & & \\ \mathbf{Dry}\mathbf{}\mathbf{Material}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Pounds}}\mathbf{\times }\mathbf{Ponds}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{941}}{\mathbf{620}\mathbf{+}\mathbf{12000}}\mathbf{\times }\mathbf{12000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{600}\\ & & \\ \mathbf{Utility}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Machine}\mathbf{}\mathbf{Hour}}\mathbf{\times }\mathbf{Machine}\mathbf{}\mathbf{hour}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{422}}{\mathbf{200}\mathbf{+}\mathbf{3750}}\mathbf{\times }\mathbf{3}\mathbf{,}\mathbf{750}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{350}\end{array}$}

$\begin{array}{rcl}\mathbf{Bottle}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Units}}\mathbf{\times }\mathbf{Units}\mathbf{}\mathbf{produced}\mathbf{}\mathbf{for}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{77}\mathbf{,}\mathbf{000}}{\mathbf{12}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{180}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{180}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{72}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{rcl}\mathbf{Labeling}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{Labels}}\mathbf{\times }\mathbf{Labels}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{525}}{\mathbf{3}\mathbf{+}\mathbf{1}}\mathbf{\times }\mathbf{1}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{631}\mathbf{.}\mathbf{25}\end{array}$

$\begin{array}{rcl}\mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{No}\mathbf{.}\mathbf{}\mathbf{of}\mathbf{}\mathbf{setups}}\mathbf{\times }\mathbf{Setups}\mathbf{}\mathbf{used}\mathbf{}\mathbf{by}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}}{\mathbf{500}\mathbf{+}\mathbf{300}}\mathbf{\times }\mathbf{300}\\ & \mathbf{=}& \mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{500}\end{array}$

_{Total cost for Hi-voltage line products = Total Mixing Department cost for product line + Total Bottling}

_{department cost for product line}

_{= $2,220 + $6,600 + $1,350 + $72,000 + $1,631.25 + $7,500}

_{= $91,301.25}

Calculation of requirement 2

$\begin{array}{rcl}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{bottle}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{for}\mathbf{}\mathbf{product}\mathbf{}\mathbf{line}}{\mathbf{Total}\mathbf{}\mathbf{no}\mathbf{.}\mathbf{}\mathbf{of}\mathbf{}\mathbf{products}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{891}}{\mathbf{12}\mathbf{,}\mathbf{500}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{83}\end{array}$

$\begin{array}{rcl}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{bottle}\mathbf{}\mathbf{for}\mathbf{}\mathbf{EasySlim}\mathbf{}\mathbf{product}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{for}\mathbf{}\mathbf{product}\mathbf{}\mathbf{line}}{\mathbf{Total}\mathbf{}\mathbf{no}\mathbf{.}\mathbf{}\mathbf{of}\mathbf{}\mathbf{products}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{91}\mathbf{,}\mathbf{301}}{\mathbf{180}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{51}\end{array}$

Calculation of requirement 3

$\begin{array}{rcl}\mathbf{Profit}\mathbf{}\mathbf{bottle}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Hi}\mathbf{-}\mathbf{voltage}\mathbf{}\mathbf{product}& \mathbf{=}& \mathbf{Selling}\mathbf{}\mathbf{price}\mathbf{}\mathbf{per}\mathbf{}\mathbf{bottle}\mathbf{-}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{bottle}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{.}\mathbf{75}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{83}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{92}\end{array}$

Explanation of requirement 4

The minimum price for the EasySlim bottle is the company's rate that incurs neither any profit nor any loss. Thus the minimum price must be equal to the cost of the product.

In the given case, the minimum price for EasySlim products must be $0.51 per bottle.