Pralina Products Company is a regional firm that has three major product lines - cereals, breakfast bars,

and dog food. The income statement for the year ended April 30, Year 4, is shown below; the statement

was prepared by product line using full-absorption costing.

PRALINA PRODUCTS COMPANY

Income Statement

For the Year Ended April 30, Year 4

(In thousands)

Cereals

Breakfast

Dog

Bars

Food

Total

Sales in pounds

2,000

500

500

3,000

Revenue from sales ..........

Cost of sales:

$1,000

$ 400

$ 200

$1,600

Direct materials

329

158

100

587

Direct labor.....

90

40

20

150

Factory overhead.

108

48

24

180

Total cost of sales

527

246

144

917

Gross margin .......

473

154

56

683

Operating costs

Selling costs:

Advertising .....

40

20

Commissions .............-......

50

40

10

20

70

110

Salaries and related benefits

30

20

10

60

Total selling expenses .......

120

80

40

240

General and administrative costs:

G&A salaries and related benefits ...........

49

25

15

89

Total operating costs

169

105

55

329

Operating profit before taxes .......-

$ 304

$ 49

$ 1

$ 354

Other data:

1 .

Costs of sales. The company's inventories of direct materials and finished products do not vary

significantly from year to year. The inventories at April 30, Year 4, were essentially identical to

those at April 30, Year 3.

Factory overhead was applied to products at 120 percent of direct labor-dollars. The factory

overhead costs for the Year 4 fiscal year were as follows:

Variable indirect labor and supplies

$

15,000

Variable employee benefits on factory labor

30,000

Supervisory salaries and related benefits

35,000

Plant occupancy costs

100,000

$ 180,000

2.

Advertising. The company has been unable to determine any direct causal relationship between the

level of sales volume and the level of advertising expenditures. However, because management

believes advertising is necessary, an annual advertising program is implemented for each product

3.

line. Each product line is advertised independent of the others.

Commissions. Sales commissions are paid to the sales force at the rates of 5 percent on the cereals

and 10 percent on the breakfast bars and dog food.

4.

Salaries and related benefits - Selling and General administrative costs. Sales, and general

administrative personnel devote time and effort to all product lines. Their salaries and wages are

allocated on the basis of management's estimates of time spent on each product line; these costs

are not affected by the production levels of each product line.