OBJECTIVE SHOW ME HOW company decide to accept it even if it shows a loss? Exercise 17-12 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 Cashew Unused Units of Butter Butter Capacity Purchase 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 $50 48 Direct labor cost per case $10 58 Advertising costs $200,000 $60,000 Practical capacity less expected usage (all unused capacity is permanent), "In some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necesary. 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, Chapter 17 Activity Resource Usage Model and Tactical Decision Making Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver. Activity Fixed Variable 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 Costs associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver. These 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. Using this approach, determine whether the cashew butter product line should be kept or dropped. 2. Prepare an activity-based segmented income statement. Repeat the keep-or-drop analysis using an ABC approach