Jazzy Cola produces a lemon- lime soda. The production process starts with workers ­mixing the lemon syrup and lime flavors in a secret recipe. The company enhances the combined syrup with caffeine. Finally, the company dilutes the mixture with carbonated water. Jazzy Cola incurs the following costs (in thousands):

Delivery truck drivers’ wages............................................................................... $ 265

Lemon syrup......................................................................................................... $ 20,000

Depreciation on delivery trucks........................................................................... $ 100

Lime flavoring....................................................................................................... $ 920

Payment for new recipe....................................................................................... $ 1,190

Customer hotline.................................................................................................. $ 190

Sales commissions................................................................................................ $ 400

Production costs of “cents- off” store coupons for customers............................. $ 470

Rearranging plant layout...................................................................................... $ 1,500

Freight- in on materials......................................................................................... $ 1,700

Depreciation on plant and equipment................................................................. $ 2,900

Bottles.................................................................................................................. $ 1,210

Salt........................................................................................................................ $ 30

Plant utilities........................................................................................................ $ 850

Wages of workers who mix syrup....................................................................... $ 7,900

Plant janitors’ wages........................................................................................... $ 1,050

Replace products with expired dates upon customer complaint....................... $ 60

Requirements

1. Classify each of the listed costs according to its category in the value chain, (R& D, ­Design, Production, Marketing, Distribution, or Customer Service).

2. Further break down production costs into three subcategories: Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH).

3. Compute the total costs for each value chain category.

4. How much are the total inventoriable product costs?

5. Suppose the managers of the R& D and design functions receive year- end bonuses based on meeting their unit’s target cost reductions. What are they likely to do? How might this affect costs incurred in other elements of the value chain?