Colorado BBQ makes a unique barbecue sauce that involves slow roasting very spicy chili peppers from India, pureeing the peppers to remove the seeds, and then flash frying the roasted peppers with the other ingredients before bottling. The sauce is sold throughout the United States. Colorado BBQ is considering entering the Canadian BBQ market with a slightly different recipe and bottle design and label. In order to be able to export its Colorado BBQ sauce into Canada without paying Canadian customs duty at 7 percent of the wholesale price (U.S. $8.99), Colorado BBQ must certify that at least 90 percent of the total manufacturing cost of the Canadian BBQ sauce is from products sourced entirely within the North American Free Trade Agreement or NAFTA (Canada, Mexico, and the United States). If more than 10 percent of the total product cost is determined to be from ingredients sourced outside of NAFTA (Canada, Mexico, and United States), then the product is subject to a 7 percent Canadian import duty. Given the competitive nature of the Canadian BBQ market, Colorado BBQ is unable to pass any Canadian customs duty on to its Canadian importer.
The current breakdown of the direct costs (excluding allocated manufacturing overheads) of the U.S. and Canadian BBQ sauces is (all amounts are U.S. dollars):
_________________________ U.S. BBQ Sauce ____________ CDN BBQ Sauce
Bottle and label ........................ $0.09 ................................ $0.14
Non-chili ingredients .................. $0.48 ................................ $0.80
Indian chilies ............................ $0.74 ................................ $0.76
Direct labor .............................. $0.11 ................................ $0.12
The manufacturing overhead for the factory that may produce both the U.S. and Canadian Colorado BBQ sauces is $383,000 per year, and 65,000 bottles will be produced for the U.S. market and 22,000 bottles for the Canadian market. Manufacturing overhead will be allocated to the two BBQ sauces using direct labor cost. All of the manufacturing costs, ingredients, and packaging (except the Indian chilies) are sourced entirely within the NAFTA countries.
Required:
a. Calculate the manufacturing overhead allocated per bottle of the Canadian BBQ sauce.
b. Calculate what, if any, Canadian import customs duty Colorado BBQ must pay on the importation of its BBQ sauce based on NAFTA.
c. Before beginning the production of its Canadian sauce, Colorado BBQ learns of a very similar chili pepper from Mexico that can be used in the Canadian BBQ sauce without altering the sauce's flavor or consistency. The cost of the Mexican chili is $1.26 per Canadian bottle of BBQ sauce instead of the $0.76 per bottle for the Indian chili. Substituting the Mexican chilies for the Indian chilies in the Canadian sauce does not alter any of the other costs of the Canadian sauce. Should Colorado BBQ substitute the Mexican chili for the Indian chili in its Canadian BBQ sauce it plans to export to Canada? What advice would you give to the managers of Colorado BBQ regarding the production, cost certification for Canadian customs under NAFTA, and exportation of its Canadian Colorado BBQ sauce?