Carlos Sanguine, Inc., makes premium wines and table wines. Grapes are crushed and the free-flowing juice and the first-processing juice are made into premium wines (bottles with corks). The second- and third-processing juices are made into table wines (bottles with screw tops). Table 1 summarizes operations for the year, and Table 2 breaks down manufacturing overhead expenses into general winery costs and production facilities costs. Table 1 Summary of Operations for the Year Tons of grapes 10,000 Average cost per ton $190 Premium wines Table wines Number of cases produced and sold 400,000 70,000 Selling price per case 11.00 7.00 Revenues 4,400,000.00 490,000.00 Grape costs 1,650,000 250,000 Packaging costs 1,000,000 140,000 Labor 200,000 35,000 Selling and distribution 400,000 35,000 Manufacturing overhead 400,000 87,500 Operating profit (loss) 750,000 (57,500) Table 2 Manufacturing overhead by Products Premium wines Table wines Total General winery costs 212,800 37,200 250,000 Production facilities costs (depr. and maint.) 187,200 50,300 237,500 Manufacturing overhead 400,000 87,500 487,500 Based on Tables 1 and 2, the accounting department prepared the report in Table 3. Table 3 Product Line Cost Structure per Case Premium wines Table wines Net sales $11.00 $7.00 Variable costs Grapes $4.13 $3.57 Packaging 2.50 2.00 Labor 0.50 0.50 selling and distribution 1.00 8.13 0.50 6.57 ------- ------ Margin $2.87 $0.43 Less manufacturing overhead 1.00 1.25 ----- ------ Operating profit (loss) $1.87 ($0.82) Table 4 Fixed and Variable costs per Product and Product Break-Even Points Premium wines Table wines Sales $11.00 $7.00 Less variable costs Grapes $4.13 $3.57 Packaging 2.50 2.00 Labor 0.50 0.50 Selling and distribution 0.66 0.33 6.583 ----- ------ Manufacturing overhead 0.12 7.91 0.18 Contribution margin $3.09 $0.42 Less unitized fixed costs per unit Selling and distribution 0.33 1.00 0.17 Manufacturing overhead 0.88 $1.21 1.07 $1.24 ----- ----- Profit (loss) $1.88 ($0.82) Break Even Fixed Costs (400,000X1.21) = 70,000X$1.24 = $484,000 $86,800 / Cont. Marg 3.09 0.42 ----- ----- 156,634 206,667 Management is concerned that the table wines have such a low margin. Some of the managers urge that these lines be dropped. Competition keeps the price down to $7 per case, which causes some managers to question how the competition could afford to sell the wine at this price. Before making a final decision, top management asked for an analysis of the fixed and variable costs by product line and their break-even points. When management saw Table 4, the president remarked