9-65. Activity-Based Costing: The Grape Cola Caper Howard Rockness was worried. His company, Rockness Bottling, showed declining profts over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs (LO 9 Rockness sent an e-mail to his executive team under the subject heading, "How do we get Rockness Bottling back on track?" Meeting in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products (These were marketing people.) Some wanted to fire the least efficient work ers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were) Rockness listened patiently. When all participants had made their cases, Rockness said We made money when we were a smaller, simpler company. We have grown, added new prod- uet lines, and added new products to old product lines. Now we are going downhill. What's wrong with this picture?" Rockness continued, "Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed copies of the following report to the people assembled in his office 1 Monthly Repont on Cola Botling Line Diet Regular Cherry Grape Total $ 75,000 60,000 $ 13.950 $1,650 $ 150,800 3 Sales 4 Less: 5 Materiels 6 Direct labor 7Fringe benefits on direct labor 8. indrect costs@ 260% of direct labor 9 Gross margin 10 Retum on sales (see note (a 11 Volume 12 Unit price 13 Unit cost 25,000 20,000 4.680 20,000 00B,000 4,000 3,200 720 $ 10.000$ 8,000 13 3% 50,000 40.00D 1.501.50 2,070S 300S 20,370 148% 9,000 1.551.65 $ 1.506 13.3% 18.2% 13.5% 1,000100.000 S 1.30$ 1.30 $ 1.32$ 1.35S $ 1.302 15 . Retun on salos before considering seling. general, and administrarive expenses Rockness asked, "Do you sce any problems here? Should we drop any of these products Should we reprice any of these products The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in the report, but they all made suggestions to Rockness ranging from "add another cola product" to "cut costs across the board" to "we need a new computer system so that managers can get this information more quickly" A not-so-patient Rockness stopped the discussion abruptly and adjourned the meet He then turned to the quietest person in the suspicious of these cost data, Rocky Here we are assigning room-his son, Rocky-and said, "I am indirect costs to these products asing a 260 percent rate I really wonder whether that rate is accurate for all products I want