Question
Luna is trying to create her master budget for the upcoming year, and she is worried. Her French Roast bean is a popular bean that
Luna is trying to create her master budget for the upcoming year, and she is worried. Her French Roast bean is a popular bean that competes directly with dark beans of other competitors. She has noticed that her competitors have been dropping their prices of these dark beans. The average market price of the dark beans is around $12.50 per pound, over 10 percent less than her current price. Luna does not believe that she can afford to drop the price anymore on her French Roast bean and is now considering whether she should even keep this product line. Her production facility is close to capacity. Luna is considering dropping the French Roast product line and using the capacity to produce her more unique blends like her Golden Roast which has little direct competition in the market. For the upcoming year, Luna estimates her overhead cost will be $4,400,000. Currently, Luna keeps things simple and allocates overhead to her product lines using direct labor hours. She expects direct labor costs to be $1,200,000 based on 100,000 direct labor hours. She also anticipates material costs made up mostly of coffee beans to be $10,000,000.
Calculate the product cost per unit and gross margin for one pound of French Roast and one pound of Golden Roast assuming direct labor hours is used to allocate overhead.
Table 1 Estimated Costs per pound for French Roast and Golden Roast Product Lines French Roast Golden Roast Direct Materials 9.00 5.80 Direct Labor* .48 .48 *.04 direct labor hours per pound Table 2 Estimated Overhead Costs and Activities Cost Pool Cost Driver Estimated Activity Estimated OH Costs Procurement Purchase Orders 2,500 orders $1,120,000 Machine Setups Number of Machine Setups 1,250 setups $386,000 Material Handling Number of Batches 625 batches $180,000 Roasting Roasting Hours 118,750 hours $2,090,000 Mixing Mixing Hours 40,000 hours $384,000 Packaging Packaging Hours 30,000 hours $240,000 Total Estimated Overhead $4,400,000 Table 3 Estimated Activity for French Roast and Golden Roast Product Lines French Roast Golden Roast Estimated Sales 100,000 pounds 5,000 pounds Roasting Hours (per 100 pounds) 1.88 hours 1.88 hours Mixing Hours (per 100 pounds) .63 hours .63 hours Packaging Hours (per 100 pounds) .38 hours .38 hours Batch Size 6,250 pounds 625 pounds Setups 2.50 per batch 2.50 per batch Purchase Order Size 25,000 pounds 625 poundsStep by Step Solution
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