California Winery California Winery makes two wines: regular wine; specialty wine. Recently, the company has shown small profits on regular wine and large profits on its specialty wine. As a result, management is considering getting out of the regular wine business and concentrating on specialty wine. This decision is difficult because the company has in the past been very profitable in regular wines, its original business. In fact, the profitability of regular wine dipped substantially only after the company got into the specialty wine business. Before making a decision, the company wants to be sure that it understands what it costs to make and sell the regular and specialty wines. This handout focuses on costs in the distribution area. California Winery distributes the regular wine and the specialty wine through completely different distribution channels. It distributes 120,000 cases of regular wine through 10 general distributors and 80,000 cases of the specialty wine through 30 specialty distributors. The Winery incurs $2,130,000 in distribution costs per year. Under its existing costing system, the Winery allocates distribution costs to products on the basis of cases shipped. To understand better the demand on its resources in the distribution area, California Winery identified three distribution activities and their related costs: 1. Promotional activity, including advertising, antique neon signs, and point-of-sales material at each distributor. The Winery estimates it incurs $8,000 per distributor. 2. Order handling costs include costs to confirm and input the order into the order entry system, set aside the correct number of cases, organize shipment and delivery, verify order packing, ensure delivery, send invoices, and follow-for payment. The Winery estimates costs of $300 for performing all the activities pertaining to each order. The Winery's records show that distributors of regular wine place an average 10 orders per year while distributors of specialty wine place an average of 20 orders per year. 3. Shipping cost is $8 per case for both regular and specialty wines. Required 1. Using the Winery's existing costing system, calculate the total distribution costs and distribution cost per case for the regular wine and the specialty wine. a) For each activity, classify the cost of the activity as an output unit-level, batch level, product or service-) sustaining, or facility-sustaining cost. Explain your answer. b) Using an activity-based costing approach, calculate the total distribution cost and distribution cost per case for the regular wine and the specialty wine. 3. Explain the cost differences and the accuracy of the product costs calculated using the existing costing system and the ABC system. How might the management of California Winery use the information from the ABC system to manage its business better? PRECISE V5