Venuchi Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 600,000 gallon jugs per year of a lowcost, high-volume product called Valley Fresh. Venuchi also produces and sells roughly 200,000 gallons per year of a low-volume, high-cost product called Venuchi Valley. Venuchi Valley is sold in 1-liter bottles. Based on recent data, the Valley Fresh product has not been as profitable as Venuchi Valley. Management is considering dropping the inexpensive Valley Fresh line so it can focus more attention on the Venuchi Valley product. The Venuchi Valley product already demands considerably more attention than the Valley Fresh line.
Vincent Venuchi, president and founder of Venuchi, is skeptical about this idea. He points out that for many decades the company produced only the Valley Fresh line, and that it was always quite profitable. It wasn't until the company started producing the more complicated Venuchi Valley wine that the profitability of Valley Fresh declined. Prior to the introduction of Venuchi Valley, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because Venuchi Valley is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box, than does Valley Fresh. The company must bottle and handle 4 times as many bottles of Venuchi Valley to sell the same quantity as Valley Fresh, since there are approximately 4 liters in a gallon. Valley Fresh requires 1 month of aging; Venuchi Valley requires 1 year. Valley Fresh requires cleaning and inspection of equipment every 2,500 gallons; Venuchi Valley requires such maintenance every 250 gallons. Vincent has asked the accounting department to prepare an analysis of the cost per gallon using the traditional costing approach and using activity-based costing. The following information was collected.

Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
(a) Under traditional product costing using direct labor hours, compute the total manufacturing cost per gallon of both products.
(b) Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity€™s overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per gallon.
(d) Compute the total manufacturing cost per gallon for both products under ABC.
(e) Write a memo to Vincent Venuchi 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 indistortions.

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Valley Fresh Direct materials per gallon Direct labor cost per gallon Direct labor hours per gallon Total direct labor hours $1.35 $0.75 0.05 Venuchi Valley $3.60 $1.50 0.10 20,000 30,000 Expected Use of Cost Expected Use of Cost Drivers per Product Estimated Activity Cost Pool Cost Driver verhead Drivers Valley Fresh Venuchi Valley Grape processing Cart of grapes 120,000 Aging Bottling and 8,000 6,000 2,000 corking Labeling and boxing Maintain and Total months Number of bottles Number of bottles Number of 420,000 3,000,000 600 210,000 140,000 1400,000 ,000 600,000 600,000 240 2,400,000 800,000 800,000 800 1,400,000 inspect equipment inspections 210,000 $1,100,000 1,040