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 93,500 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 52,700 packages and Mega Stores orders 18,500 packages annually. Variable manufacturing costs are $17 per package, and annual fixed manufacturing costs are $564,000.

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 17,100 packages during the holidays and 35,600 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.

Non Holiday: Product Cost per Package?

Holiday: Product Cost per Package?

Answer 1

Answer :

Capacity of plant	93500
Fixed cost of plant	564000		Vern	Mega
Holiday season	4	months	17100	18500	35600
Non holiday season	8	months	35600	0	35600

(a). Cost incurred calculation
		Fixed cost	Unit production	FC per unit	VC per unit	Total cost per unit
Holiday	4	188000	35600	5.280899	17	22.2809
Non Holiday	8	376000	35600	10.5618	17	27.5618
			71200

Total production is 71200 units, however plant capacity is 93500 units

Thus if we adjust fixed cost for the production level

For 71200 units FC should be 429484.5

		Fixed cost	Unit production	FC for unit	VC per unit	Total cost per unit
Holiday	4	143161.5	35600	4.02139	17	21.0214
Non Holiday	8	26323	35600	8.042781	17	25.0428
			71200