Polzin Corporation Accounting Exercise

Question
P4-4A (a-d)

Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn’t until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.

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CoolDay

LiteMist

Direct materials per liter

$0.40

$1.20

Direct labor cost per liter

$0.25

$0.50

Direct labor hours per liter

0.05

0.09

Total direct labor hours

150,000

27,000

Activity Cost Pool

Cost Driver

Estimated Overhead

Expected
Use of
Cost Drivers

Expected Use of
Cost Drivers per Product

CoolDay

LiteMist

Grape processing

Cart of grapes

$145,860

6,600

6,000

600

Aging

Total months

396,000

6,600,000

3,000,000

3,600,000

Bottling and corking

Number of bottles

270,000

900,000

600,000

300,000

Labeling and boxing

Number of bottles

189,000

900,000

600,000

300,000

Maintain and inspect equipment

Number of inspections

240,800

800

350

450

$1,241,660

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