Keep-or-Drop: Traditional Versus Activity-Based Analysis

Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow:

	Peanut Butter	Cashew Butter	Unused Capacitya	units of Purchaseb
Expected sales (in cases)	50,000	10,000	-	-
Selling price per case	$100	$80	-	-
Direct labor hours	40,000	10,000	-	As needed
Receiving orders	500	250	250	500
Packing orders	1,000	500	500	250
Material cost per case	$55	$48	-	-
Direct labor cost per case	$10	$8	-	-
Advertising costs	$300,000	$60,000	-	-
aPractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity.

Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver.

Activity	Fixeda	Variableb
Direct labor benefits	$0	$200,000
Machine	200,000	250,000
Receiving	200,000	22,500
Packing	100,000	45,000
Total costs	$500,000	$517,500

^aCosts associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver.

^bThese costs are for the actual levels of the cost driver.

Required:

1. Prepare a traditional segmented income statement, using a unit-level overhead rate based on direct labor hours.

Nutterco, Inc.
Traditional Income Statement
	Peanut Butter	Cashew Butter	Total
Revenues	$fill in the blank	$fill in the blank	$fill in the blank
Less variable expenses:
Direct materials	fill in the blank	fill in the blank	fill in the blank
Direct labor	fill in the blank	fill in the blank	fill in the blank
Variable overhead	fill in the blank	fill in the blank	fill in the blank
Contribution margin	$fill in the blank	$fill in the blank	$fill in the blank
Less direct fixed expenses	fill in the blank	fill in the blank	fill in the blank
Product margin	$fill in the blank	$fill in the blank	$fill in the blank
Less common fixed expenses			fill in the blank
Operating income			$fill in the blank

Using this approach, determine whether the cashew butter product line should be kept or dropped.

Kept

2. Prepare an activity-based segmented income statement. Use a minus sign to indicate a negative product margin.

Nutterco, Inc.
Activity-Based Income Statement
	Peanut Butter	Cashew Butter	Total
Revenues	$fill in the blank	$fill in the blank	$fill in the blank
Less variable costs	fill in the blank	fill in the blank	fill in the blank
Contribution margin	$fill in the blank	$fill in the blank	$fill in the blank
Less traceable expenses:
Advertising	fill in the blank	fill in the blank	fill in the blank
Receiving	fill in the blank	fill in the blank	fill in the blank
Packing	fill in the blank	fill in the blank	fill in the blank
Product margin	$fill in the blank	$fill in the blank	$fill in the blank
Less unused activity expenses:
Receiving			fill in the blank
Packing			fill in the blank
Common fixed expenses (machine depreciation)			fill in the blank
Operating income			$fill in the blank