Chocolate Bors, Inc. (CBI), manufactures cresmy deluxe chocolate candy bars. The firm has developed three distinct products: Almond Dream, Krispy Kreckle, and Creamy Crunch. CBI is profitable, but management is quite concerned about the profitability of each product and the product costing methods currently employed. In particular, management questions whether the overhead allocation base of direct labor-hours accurately reflects the costs incurred during the production process of each product. In reviewing cost reports with the marketing manager, Steve Hoffman, who is the cost accountant, notices that Creamy Crunch appears exceptionally profitable and that Almond Dream appears to be produced at a loss. This surprises both him and the manager, and after much discussion, they are convinced that the cost accounting system is at fault and that Almond Dresm is performing very well at the current market price. Steve decides to hire Jean Sharpe, a management consultant, to study the firm's cost system over the next month and present her findings and recommendations to senior management. Her objective is to identify and demonstrate how the cost accounting system might be distorting the firm's product costs. Jean begins her study by gathering information and documenting the existing cost accounting system. It is rather simplistic, using a single overhead allocation basedirect Isbor-hoursto calculate and apply overhead retes to all products. The rete is calculated by summing variable and fixed overhead costs and then dividing the result by the number of direct labor-hours. The product cost is determined by multiplying the number of direct labor-hours required to manufacture the product by the overhead rate and adding this amount to the direct labor and direct material costs. CBI engages in two distinct production processes for each product. Process 1 is labor intensive, using a high proportion of direct materials and labor. Process 2 uses special packing equipment that wraps each individual candy bar and then packs it into a box of 24 bors. The boxes are then packaged into coses, each of which has six boxes. Special packing equipment is used on all three products and has a monthly capacity of 3.000 cases, esch containing 144 candy bars = 6 boxes * 24 bers). To illustrate the source of the distortions to senior management, Jeon collects the cost osts for the three products, Almond Dream, Krispy Krackle, and Creamy Crunch. Almond Dream Krispy Krackle 1.000 1,000 Creamy Crunch 1.0 1,800 $9.90 $ 6.00 1,290 $ 52.48 8,420 $26.40 4,400 Product costs Labor-hours per case Total cases produced Material cost per case Direct labor cost per case Labor-hours per product Total overhead - $76,500 Total labor-hours - 13,892 Direct labor costs per hour - $6.20 Allocation rate per labor-hour - (a). Costs of products Material cost per case Direct labor cost per case Allocated overhead per case(to be computed) Product cost $ $ 50.40 (b) (c) 26.40 (c) 6.00 (d) (9) CBI recently adopted a general policy to discontinue all products whose gross profit mergin percentages [(Gross margin = Selling price)
