Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line. Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters. Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected. CoolDay LiteMist Direct materials per liter $0.40 $1.20 Direct labor cost per liter $0.25 $0.50 Direct labor hours per liter 0.05 0.09 Total direct labor hours 150,000 27,000 Activity Cost Pool Cost Driver Estimated Overhead Expected Expected Use of Use of Cost Drivers Cost Drivers per Product CoolDay LiteMist Grape processing Cart of grapes $145,860 6,600 6,000 600 Aging Total months 396,000 6,600,000 3,000,000 3,600,000 Bottling and corking Number of bottles 270,000 900,000 600,000 300,000 Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000 Maintain and inspect Number of inspections 240,800 800 350 450 equipment $1,241,660 1)Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products. (Round computations and final answers to 3 decimal places, e.g. 2.250.) CoolDay$ _________ LiteMist$____________ 2)Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver). (Enter overhead rate to 2 decimal places, e.g. 10.50.) Activity Cost Pools Estimated Overhead Expected Use Activity-Based Overhead Rate of Cost Drivers Grape processing Aging Bottling and corking Labeling and boxing Maint. & inspect equip. 3)Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter? (Enter overhead rate to 2 decimal places, e.g. 10.50 and round overhead cost per liter to 3 decimal places, e.g. 2.250.) Cool Day Activity Cost Pools Expected Use of Cost Drivers Activity-BasedOverhead Rates Cost Assigned Grape processing Aging Bottling and corking Labeling and boxing Maint. & inspect equip. Total costs assigned Liters produced Overhead cost per liter LiteMist Activity Cost Pools Expected Use of Cost Driver Activity-Based Overhead Rates Cost Assigned Grape processing Aging Bottling and corking Labeling and boxing Maint. & inspect equip. Total costs assigned Liters produced Overhead cost per liter 4) Compute the total manufacturing cost per liter for both products under ABC. (Round answers to 3 decimal places, e.g. 2.250.) CoolDay $ LiteMist $ 5) Write a memo to Greg Kagen discussing the implications of your analysis for the company's plans. In this memo provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions