Problem 10-69 (Algo) Assigning Capacity Costs: Seasonality (LO 10-6)

Mercia Chocolates produces gourmet chocolate products with no preservatives. Any production must be sold within a few days, so producing for inventory is not an option. Mercias single plant has the capacity to make 91,500 packages of chocolate annually. Currently, Mercia sells to only two customers: Verns Chocolates (a specialty candy store chain) and Mega Stores (a chain of department stores). Verns orders 48,300 packages and Mega Stores orders 16,500 packages annually. Variable manufacturing costs are $13 per package, and annual fixed manufacturing costs are $522,000.

The gourmet chocolate business has two seasons, holidays and non-holidays. The holiday season lasts exactly four months and the non-holiday season lasts eight months. Verns orders the same amount each month, so Verns orders 15,900 packages during the holidays and 32,400 packages in the non-holiday season. Mega Stores only carries Mercias chocolates during the holidays.

Required:

a. Calculate the product cost for each season with excess capacity costs assigned to season in which it is incurred.

b. Calculate the product cost for each season with excess capacity costs assigned to the season requiring it.