Keep-or-Drop: Traditional Versus Activity-Based Analysis

Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow:

	Peanut Butter	Cashew Butter	Unused Capacitya	units of Purchaseb
Expected sales (in cases)	50,000	10,000	-	-
Selling price per case	$100	$80	-	-
Direct labor hours	40,000	10,000	-	As needed
Receiving orders	500	250	250	500
Packing orders	1,000	500	500	250
Material cost per case	$50	$49	-	-
Direct labor cost per case	$11	$8	-	-
Advertising costs	$200,000	$60,000	-	-
aPractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity.

Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver.

Activity	Fixeda	Variableb
Direct labor benefits	$0	$200,000
Machine	200,000	250,000
Receiving	200,000	22,500
Packing	100,000	45,000
Total costs	$500,000	$517,500

^aCosts associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver.

^bThese costs are for the actual levels of the cost driver.

Required:

1. Prepare a traditional segmented income statement, using a unit-level overhead rate based on direct labor hours.

	Peanut Butter	Cashew Butter	Total
Direct laborDirect materialsCommon fixed expensesDirect fixed expensesRevenuesVariable overhead	$- Select -	$- Select -	$- Select -
Less variable expenses:
Common fixed expensesDirect fixed expensesDirect materialsRevenuesSetups	- Select -	- Select -	- Select -
Common fixed expensesDirect fixed expensesDirect laborSetupsRevenues	- Select -	- Select -	- Select -
Common fixed expensesDirect fixed expensesRevenuesVariable overhead	- Select -	- Select -	- Select -
Contribution margin	$fill in the blank f606e7fa1fa103b_17	$fill in the blank f606e7fa1fa103b_18	$fill in the blank f606e7fa1fa103b_19
Less direct laborLess direct materialsLess common fixed expensesLess direct fixed expensesLess revenuesLess variable overhead	- Select -	- Select -	- Select -
Product margin	$fill in the blank f606e7fa1fa103b_24	$fill in the blank f606e7fa1fa103b_25	$fill in the blank f606e7fa1fa103b_26
Less direct laborLess direct materialsLess common fixed expensesLess direct fixed expensesLess revenuesLess variable overhead			- Select -
Operating income			$fill in the blank f606e7fa1fa103b_29

Using this approach, determine whether the cashew butter product line should be kept or dropped.

2. Prepare an activity-based segmented income statement. Use a minus sign to indicate a negative product margin.

	Peanut Butter	Cashew Butter	Total
Revenues
Less common fixed expenses (machine depreciation)
Contribution margin
Less traceable expenses:
Advertising
Receiving
Packing
Product margin
Less unused activity expenses:
Receiving			$fill in the blank
Packing			$fill in the blank
Common fixed expenses (machine depreciation)			$fill in the blank
Operating income			$fill in the blank

Using ABC approach, determine whether the cashew butter product line should be kept or dropped.