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Polzin Corporation Accounting Exercise

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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.;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

 

Paper#45412 | Written in 18-Jul-2015

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