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 explaine an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.

CoolDay

LiteMist

Direct materials per liter$0.40$1.20Direct labor cost per liter$0.50$0.90Direct labor hours per liter0.050.09Total direct labor hours150,00027,000

Estimated Use of Cost

Drivers per Product

Activity Cost Pools

Cost Drivers

Estimated Overhead

Estimated Use of

Cost Drivers

CoolDay

LiteMist

Grape processingCart of grapes$145,860

6,600

6,000

600

AgingTotal months396,000

6,600,000

3,000,000

3,600,000

Bottling and corkingNumber of bottles270,000

900,000

600,000

300,000

Labeling and boxingNumber of bottles189,000

900,000

600,000

300,000

Maintain and inspect equipmentNumber of inspections240,800

800

350

450

$1,241,660

(e)

Write a memo to Jack Eller discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC as well as an explanation of how the traditional approach can result in distortions.