Question

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. Mercia’s single plant has the capacity to make 97,000 packages of chocolate annually. Currently, Mercia sells to only two customers: Vern’s Chocolates (a specialty candy store chain) and Mega Stores (a chain of department stores). Vern’s orders 60,400 packages and Mega Stores orders 22,000 packages annually. Variable manufacturing costs are $24 per package, and annual fixed manufacturing costs are $627,000.

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. Vern’s orders the same amount each month, so Vern’s orders 19,200 packages during the holidays and 41,200 packages in the non-holiday season. Mega Stores only carries Mercia’s 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.

Require A

Product cost

Non-holiday ??? per package

Holiday ??? per package

Require B

Product cost

Non-holiday ???? per package

Holiday ????   per package

Answer 1

a)

particulars	holiday season 4 months	non holiday season 8months
Vern’s Chocolates:	19,200 packages	41,200 packages
Variable manufacturing costs @ $24 per package	460800	988800
fixed manufacturing costs are $627,000.	209000	418000
Mega Stores	22,000 packages	-
Variable manufacturing costs @ $24 per package	528000	-
capacity (annual 97000) packages	32333	64667
excess capacity	8867	-
excess capacity cost @ 24 per package	212808	-
total costs	1410608	1406800
cost per package = total cost / packages	43.63	21.75