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 97,500 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 61,500 packages and Mega Stores orders 22,500 packages annually. Variable manufacturing costs are $25 per package, and annual fixed manufacturing costs are $624,000.

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 19,500 packages during the holidays and 42,000 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

Answer 1

a) Excess capacity costs assigned to season in which it is incurred, then to products in that season.
The capacity costs in each season are $= $62,4000 ÷ 2 seasons)
Holiday Capacity =	19500
NonHoliday capacity =	61500
Holiday :
Overhead rate =($312000  ÷ 19500 packages) =	$       16.00	per package
Product cost = $25 + $16	$       41.00	per package
Non Holiday :
Overhead rate =($312000  ÷ 61500 packages) =	$         5.07	per package
Product cost = $25 + $5.07	$       30.07	per package
b) Excess capacity costs assigned to the season requiring it, then to products produced in that season
Holiday :
Overhead rate =($312000 x 50%  ÷ 19,500 packages) =	8	per package
Product cost = $25 + $8	33	per package
Non Holiday :
Overhead rate =($312000 + [(312000 x 50%) ] ÷ 61,500 packages) =	$         7.61	per package
Product cost = $25 + $7.61	$       32.61	per package