Question

a) Determine the break-even in sales dollars for the Skinny-Bar product and show a variable costing income statement based on the information provided in Exhibit 1 for actual sales. The income statement must include the cost of direct materials, direct labour, variable manufacturing overhead, fixed manufacturing overhead, and fixed general and administrative costs.

b) what will a lifetime cost analysis of Skinny-Bar and propose a selling price for this new product based on BBCC's markup policy. The overhead costs, the batch size, the machine hours per batch, the number of inspections per batch, set up times and the number of product lines should be based on the activity-based analysis prepared in requirement 1 using the batch size for the The-Bar product. Direct labour hours per batch is 22.5. Product costs are based on one product line. Lifetime research and development costs are $900,000 for the Skinny-Bar. Use the activity rates calculated in requirement 1 as well. Compare the proposed price with the selling price set at the time of the initial introduction of this product. Discuss the adequacy of this new proposed price.

Exhibit 1 The Skinny-Bar According to the latest market research, there is a rising health concern resulting from the over-consumption of products with high sugar content. Some think that the industry may be faced with government regulations to lower the sugar content in chocolate bars. While the company hasn't been affected by this yet, it wouldn't take long to feel the effects of a major news network reporting on the confectionary industry's use of sugar in its products. To mitigate this risk, about three years ago, marketing and production managers got together to pilot a chocolate bar called the Skinny-Bar. The product manager, Ned, was able to develop a great-tasting product with stevia as a substitute for sugar. It was introduced into the market in early June of 20X5 as an even healthier version of TheBar. The intention was to take advantage of the peak in demand for chocolate during the Christmas season. Because the advertising campaign was delayed, the general public wasn't aware of the product, and its introduction generated a loss. However, the company managers have been discussing the potential to look at this product again. Should the decision be made to reintroduce the Skinny-Bar, $900,000 ($300,000 per year for three years) of research and development will be needed to get the product ready for market. The company should be able to sell 300,000 bars per year and analysis shows that these levels are likely to hold for the next 10 years. The direct ingredients, direct labour costs and fixed general and administrative expenses from the 20X5 original plan are valid numbers for planning a relaunch. In addition, an activity-based approach for the manufacturing overhead would be best and further information for doing an ABC analysis is provided in the planning notes in Exhibit 6. It would be useful to reprice the Skinny-Bar using the activity-based approach and BBCC's latest markup policy of 20% of full cost. Because Skinny-Bar does not have any particulates, it would be logical to use the ABC activities and analysis from The-Bar to cost the manufacturing overhead for Skinny-Bar. Unfortunately, true financial information for Skinny-Bar is not available because the product information was combined with the costs and revenues of the The-Bar product for the year. The only information about this product is below in Exhibit 1.

Exhibit 1

Planning notes from the 20X5 launch of the Skinny-Bar 20X5

actual sales $288,600

Total manufacturing costs 230,880

(Total manufacturing cost consists of $115,440 in prime costs and $147,186 in conversion costs.)

The contribution margin ratio for this product was 35%.

156,000 bars were sold at $1.85 per bar.

This was a pilot project of the product, so there were no beginning or ending inventories associated with the product. All non-manufacturing costs relating to this product are fixed.

The margin of safety percentage for the product at this sales level was -15%. The profit margins on the company's current products can be found below in Exhibit 2. The most profitable product is the Salt-Lick bar at 25.9%, followed by Alamonde at 19.3% and The-Bar at 18.8%. Budgeted margins were 14.3%, 27.5%, and 35.2% for The-Bar, Alamonde, and Salt-Lick, respectively.

Intermediate Management Accounting Project Details The following are some key points to consider when allocating costs: . Indirect labour is split between the following activities: Total o 45% for cleaning, preparing, and setting up machines for batch runs 55% to scheduling production runs. This includes purchasing and releasing materials for production and scheduling production. Setup time for batches of The-Bar is the shortest at about one hour. The setup for the Alamonde bar takes longer (about three hours) because the particulate equipment has to be set up and tested in order to add almonds to the mix. The setup for the Salt-Lick bar takes the longest (about four hours) because the salt sprinkling machine must be set up and properly tested for correct temperature before the production run. Quality control is responsible for ensuring that the finished product achieves strict standards set out by the research department. Depending on the product, inspections are made at different stages of the process. Because it has no special additions, The-Bar is tested only at the refining stage and at the finished stage. In addition to these inspections, Alamonde is inspected after the particulate is added and Salt-Lick is inspected after the salt granules are added. All lab testing labour and supplies are currently allocated to the quality control account using the normal costing system. After interviewing the systems administrator, it was discovered that most of the computer's time and supplies expense is used to schedule production runs in the factory and to order and pay for the materials required in each production run (approximately 80%). The remaining 20% of computer expense is allocated to keeping records of the three products and their production, so it would fall under product administration. Research and development activities are currently concentrated on improving the flavour and consistency of the particulates and salt added to the bars. Approximate 525 hours have been spent on researching a variety of ways that could possibly achieve this goal. As The-Bar does not contain any additional particulates, this cos is allocated to Alamonde and Salt-Lick based on research hours for each. Plant utilities, plant maintenance, and plant equipment amortization are incurred to supply machine time as part of machine operation to produce chocolate bars.Intermediate Management Accounting Project Details Production cost pools and related activities - based on 20X7 production Activity The-Bar Alamonde Salt-Lick Total Production volume (bars)* 776,000 528,000 302,500 1,606,500 Batch size (bars) 4,000 3,000 2,500 Machine hours per batch 13.0 18.0 19.0 Number of annual production runs 194 176 121 491 (batches) Number of inspections per batch 3 - N Setup time (hours) - wow 4 Number of product lines 1 Research and development hours 75 450 525 *Due to stable inventory levels, it is assumed that sales equal production. it in theIntermediate Management Accounting Project Details Exhibit 6 A consultant was hired last year to determine the cost pools of all company processes, but the information was never used to perform an activity-based costing analysis because of lack of time. What is needed is an activity-based analysis of current overhead allocations, and a proper cost of goods manufactured schedule. Below are the consultant's planning notes. Planning notes: Activity-based costing project - 20X6 TO: Alan, President, Boston Bar Chocolate Company FROM: Solomon, ABC consultant RE: Activity-based costing project Thank you for giving me the opportunity to develop an activity-based costing approach for your product lines. The following is a summary of my findings. After viewing production processes and interviewing staff in operations, the following activity pools and the activity drivers were determined to adequately define the basic steps in the production line: Activity Activity driver Scheduling production runs Number of production runs Machine setup Setup hours Product administration Number of product lines Machine operations Machine hours Inspection Number of inspections Research and development R&D hours Plant lease Currently, your manufacturing overhead accounts consist of the following: plant utilities plant maintenance quality control computer and supplies ant amon plant equipment amortization to produce research and development plant salary and wages (indirect) plant lease The balance in all of these accounts can be allocated to the three products using an activity-based approach except for the plant lease which is a facility-sustaining cost