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Mendocino Corporation 300000

Price: $2.50


Mendocino 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. Mendocino
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.

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   120,000  25,000

Tyler Silva, president and founder of Mendocino, 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.
Tyler 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.

Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
(a) Under traditional product costing using direct labor hours, compute the total manufacturing
cost per liter of both products.
(b) Under ABC, prepare a schedule showing the computation of the activity-based
overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity’s overhead cost pool to each product, based
on the use of cost drivers. Include a computation of overhead cost per liter.
(d) Compute the total manufacturing cost per liter for both products under ABC.

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