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 Lite Mist product. The Lite Mist 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 Lite Mist, the company had basic equipment, simple growing and production procedures, and virtually no need for quality control. Because Lite Mist 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; Lite Mist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters: Lite Mist 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 CoolDay Lite Mist Direct materials per liter $1.20 Direct labor cost per liter $0.90 Direct labor hours per liter 0.05 Total direct labor hours 27.000 $0.40 $0.50 0.09 150,000 Estimated Use of Cost Drivers per Product Activity Cost Pools Grape processing Aging Bottling and corking Labeling and boxing Cost Drivers Cart of grapes Total months Number of bottles Number of bottles Estimated Overhead $145,860 396,000 270,000 189.000 Estimated Use of Cost Drivers 6,600 6,600,000 900,000 900.000 CoolDay 6,000 3.000.000 600,000 600,000 Lite Mist 600 3,600,000 300,000 300,000 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 Lite Mist product. The Lite Mist 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 Lite Mist, the company had basic equipment, simple growing and production procedures, and virtually no need for quality control. Because Lite Mist 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; Lite Mist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters: Lite Mist 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 CoolDay Lite Mist Direct materials per liter $1.20 Direct labor cost per liter $0.90 Direct labor hours per liter 0.05 Total direct labor hours 27.000 $0.40 $0.50 0.09 150,000 Estimated Use of Cost Drivers per Product Activity Cost Pools Grape processing Aging Bottling and corking Labeling and boxing Cost Drivers Cart of grapes Total months Number of bottles Number of bottles Estimated Overhead $145,860 396,000 270,000 189.000 Estimated Use of Cost Drivers 6,600 6,600,000 900,000 900.000 CoolDay 6,000 3.000.000 600,000 600,000 Lite Mist 600 3,600,000 300,000 300,000
