Question

Mercia Chocolates produces gourmet chocolate products with no preservatives. Any production must be sold within a...

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 94,500 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 54,900 packages and Mega Stores orders 19,500 packages annually. Variable manufacturing costs are $19 per package, and annual fixed manufacturing costs are $534,000. 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 17,700 packages during the holidays and 37,200 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. Note: I cannot figure out the Holiday rate for Part B. I have found all of the other answers (Part A: H-23.78, NH-28.57; Part B: NH-25.52)

Homework Answers

Answer #1

Capacity to make package of chocolates annually = 94,500

Vern’s order annually = 54,900

Mega's order annually = 19,500

A)

Total excess capacity cost = $537,000 per year

Excess capacity cost per month =$534,000 ÷ 12

= $44,500

Non Holiday season is for 8 months and Holiday season is for 4 months

For Non Holiday season

Excess capacity cost = $44,500 x 8 months

= $356,000

Package orders = Mega staores orders + Vern's orders

= 19,500 + 54,900

= 74,400

Capcity cost per package = Excess capacity cost ÷ Package orders

= $356,000 ÷ 74,400

= $4.78

Product cost = Capcity cost per package + Variable manufacturing cost

= $4.78 + $19

= $23.78

For Holiday season

Excess capacity cost = $44,500 x 4 months

= $178,000

Package orders = Mega staores orders + Vern's orders

= 19,500 + 54,900

= 74,400

Capcity cost per package = Excess capacity cost ÷ Package orders

= $178,000 ÷ 74,400

= $2.39

Product cost = Capcity cost per package + Variable manufacturing cost

   = $2.39 + $19

= $21.39

B)

For Non Holiday season

Excess capacity cost = $534,000 x 1/3

= $178,000

Packages per order = 74,400

Capcity cost per package = Excess capacity cost ÷ Package orders

= $178,000 ÷ 74,400

= $2.39

Product cost = Capcity cost per package + Variable manufacturing cost

= $2.39 + $19

= $21.39

For Holiday season

Excess capacity cost = $534,000 x 2/3

= $356,000

Packages per order = 74,400

Capcity cost per package = Excess capacity cost ÷ Package orders

= $356,000 ÷  74,400

= $4.78

Product cost = Capcity cost per package + Variable manufacturing cost

  = $4.78 + $19

= $23.78

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