Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, How do we get Rockness Bottling back on track? Meeting in Rocknesss spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, We made money when we were a smaller, simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going downhill. Whats wrong with this picture? Rockness continued, Here, look at this report. This is last months report on the cola bottling line. What do you see here? He handed copies of the following report to the people assembled in his office. Monthly Report on Cola Bottling Line Diet Regular Cherry Grape Total Sales $ 418,500 $ 229,400 $ 81,900 $ 30,875 $ 760,675 Less: Materials 236,000 141,200 52,520 22,675 452,395 Direct labor 35,500 16,500 5,200 1,100 58,300 Fringe benefits on direct labor 14,200 6,600 2,080 440 23,320 Indirect costs (@260% of direct labor) 92,300 42,900 13,520 2,860 151,580 Gross margin $ 40,500 $ 22,200 $ 8,580 $ 3,800 $ 75,080 Return on sales (see note [a]) 9.7 % 9.7 % 10.5 % 12.3 % 9.9 % Volume 135,000 74,000 26,000 9,500 244,500 Unit price $ 3.10 $ 3.10 $ 3.15 $ 3.25 $ 3.11 Unit cost $ 2.80 $ 2.80 $ 2.82 $ 2.85 $ 2.80 a Return on sales before considering selling, general and administrative expenses. Rockness asked, Do you see any problems here? Should we drop any of these products? Should we reprice any of these products? The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in the report, but they all made suggestions to Rockness ranging from add another cola product to cut costs across the board to we need a new computer system so that managers can get this information more quickly. A not-so-patient Rockness stopped the discussion abruptly and adjourned the meeting. He then turned to the quietest person in the roomhis son, Rockyand said, I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products. Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found: Indirect labor $ 58,300 Fringe benefits on indirect labor 23,320 Information technology 42,360 Machinery depreciation 16,500 Machinery maintenance 7,400 Energy 3,700 Total $ 151,580 Then, he began a series of interviews with department heads to see how to assign these costs to cost pools. He found that 40 percent of indirect labor was for scheduling or for handling production runs, including purchasing, preparing the production run, releasing materials for the production run, and performing a first-time inspection of the run. Another 50 percent of indirect labor was used to set up machinery to produce a particular product. The remaining 10 percent of indirect labor was spent maintaining records for each of the four products, monitoring the supply of raw materials required for each product, and improving the production processes for each product. This 10 percent of indirect labor was assigned to the cost driver number of products. Interviews with people in the information technology department indicated that $42,360 was allocated to the cola bottling line. 80 percent of this $42,360 information technology cost was for scheduling production runs. 20 percent of the cost was for record keeping for each of the four products. Fringe benefits were 40 percent of labor costs. The rest of the overhead was used to supply machine capacity of 48,900 hours of productive time. Rocky then found the following cost driver volumes from interviews with production personnel. Setups: 1,070 labor-hours for setups. Production runs: 535 production runs. Number of products: 4 products. Machine-hour capacity: 48,900 hours. Diet cola used 370 setup hours, 210 production runs, and 13,500 machine-hours to produce 135,000 units. Regular cola used 145 setup hours, 115 production runs, and 7,400 machine-hours to produce 74,000 units. Cherry cola used 410 setup hours, 115 production runs, and 2,600 machine-hours to produce 26,000 units. Grape cola used 145 setup hours, 95 production runs,and 950 machine-hours to produce 9,500 units. Rocky learned that the production people had a difficult time getting the taste just right for the Cherry and Grape colas, so these products required more time per setup than either the Diet or Regular colas. Required: a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape. b. What is the cost of unused capacity? c. Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottlings market, assume that it would use 24,450 hours of machine time to make 244,500 units. (Recall that the machine capacity in this case is 48,900 hours, while Diet, Regular, Cherry, and Grape consume only 24,450 hours.) Vanilla colas per unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total.

Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, "How do we get Rockness Bottling back on track?" Meeting in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, "We made money when we were a smaller, simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going downhill. What's wrong with this picture?" Rockness continued, Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed copies of the following report to the people assembled in his office. Monthly Report on Cola Bottling Line Diet $418,500 Regular $229,400 Cherry $81,900 Grape $30,875 Total $760,675 Sales Less: Materials Direct labor Fringe benefits on direct labor Indirect costs (@260% of direct labor) Gross margin Return on sales (see note [a]) Volume Unit price Unit cost 236,000 35,500 14,200 92,300 $ 40,500 9.7% 135,000 $ 3.10 $ 141,200 16,500 6,600 42,900 $ 22,200 9.7% 74,000 $ 3.10 $ 2.80 52,520 5,200 2,080 13,520 $ 8,580 10.5% 26,000 $ 3.15 $ 2.82 22,675 1,100 440 2,860 $ 3,800 12.3% 9,500 $ 3.25 $ 2.85 452, 395 58,300 23,320 151,580 $ 75,080 9.9% 244,500 $ 3.11 $ 2.80 2.80