Polzin Corporation Accounting Exercise

$8.00

Description









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











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