Fizz Cola produces a lemon-lime soda. The production process starts with workers mixing the lemon syrup and lime flavors in a secret recipe. The company enhances the combined syrup with caffeine. Finally, the company dilutes the mixture with carbonated water.

Fizz Cola incurs the following costs (in thousands):

Plant janitors' wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,200
Delivery truck drivers' wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$295
Payment for new recipe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,220
Depreciation on delivery trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$200
Plant utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$750
Lime flavoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,080
Rearrangment of plant layout. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,000
Bottles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,210
Salt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$45
Sales commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$525
Production costs of "cents-off" store coupons for customers. . . . . .	$530
Lemon syrup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$20,000
Replace products with expired dates upon customer complaint. . . .	$65
Depreciation on plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . .	$3,300
Wages of workers who mix syrup. . . . . . . . . . . . . . . . . . . . . . . . . . . .	$8,100
Customer hotline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$180
Freight-in on materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,300

.

Requirements 1, 2 and 3. Classify each of these costs according to its category in the value chain and further break down production costs into three subcategories: Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH). Compute the total costs for each value chain category. (If a box is not used in the table, leave the box empty; do not enter a zero.)

Fizz Cola
Value Chain Cost Classification
			Production
			Direct	Direct	Manufacturing			Customer
Cost	R & D	Design	Materials	Labor	Overhead	Marketing	Distribution	Service

Plant janitors' wages
Truck drivers' wages
Payment for new recipe
Depreciation on trucks
Plant utilities
Lime flavoring
Rearrange plant layout
Bottles
Salt

Sales commissions
Production costs of
"cents-off" coupons
Lemon syrup
Replace products with
expired dates
Depreciation on plant
and equipment
Wages of workers who
mix syrup
Customer hotline
Freight-in on materials

Total costs

Requirement 4. How much are the total product costs?

Determine the formula, then calculate the total product costs.

		+		+		=	Total product costs
		+		+		=

Requirement 5. Suppose the managers of the R&D and design functions receive year-end bonuses based on meeting their unit's target cost reductions. What are they likely to do? How might this affect costs incurred in other elements of the value chain?

The managers of R&D and Design are likely to

cut their costs

increase their costs

make no changes to costs

. This can

decrease

increase

costs of later value-chain elements.

Select the answer that shows how cutting costs might affect other elements of the value chain.

A.

If the recipe is not designed so the soda is easy to produce, or if the production process is not well laid-out, production costs will be higher than they need to be.

B.

If the recipe is not adjusted to consumer tastes, more marketing may be required and/or sales may decline.

C.

If cutting R&D and Design costs leads to lower quality soda, customer service costs such as returns may also increase.

D.

All of the above