Question

Swiss Chocolate’s U.S. division will be diversifying its productline to include two product offerings, a basic plain milk-chocolatecandy bar, and a fruit-infused high cacao content premium candybar. The candy bars are processed through a molding operation inwhich molten chocolate is injected into a mold and cooled to roomtemperature, removed from the mold, and packaged for storage andbulk palletized shipment.

Below is information regarding the direct costs and volumes ofthe two major products:

Variable cost and volume data	Milk chocolate	Premium cacao
Raw materials	$0.50	$0.75
Direct labor	$0.25	$0.40
Selling and general	$0.05	$0.05
Volume in units	300,000	100,000

Sales prices of the two products are $2.65 for milk chocolateand $4.99 for premium cacao. The number of hours required tomanufacture each unit was the same for both products.

After an interview process with the factory and productionpersonnel, the division controller, Steve Smith, completed thefollowing table. From its simple cost structure, the companydecided to reconsider its overhead pool and reallocate on the basisof activity-based costing. Its simple overhead pool has beenreclassified according to the ABC hierarchy within the followingtable:

ABC Cost Pools	Indirect manufacturing labor	Factory Insurance & Utilities	Depreciation -- Machinery and factory	Repairs and maintenance -- factory	Selling, marketing and distrubution expenses	General & administrative expenses
Product Development	$ 25,000
Setup Candy Molding Equipment	$ 12,000		$ 18,500
Equipment Operations	$ 15,500	$ 31,500	$ 20,000	$ 10,000
Shipment Preparation					$ 20,000
Distribution				$ 4,000
Administration					$ 20,000	$ 60,000
Totals	$ 52,500	$ 31,500	$ 38,500	$ 14,000	$ 40,000	$ 60,000

Smith also noted the following percentage allocations of costfor the activities which are required to manufacture eachproduct.

ABC cost allocation percentages	Milk chocolate	Premium cacao
Product development	20%	80%
Setup candy molding equipment	60%	40%
Equipment operations	75%	25%
Shipment preparation	70%	30%
Distribution	65%	35%
Administration	50%	50%

From the cost information provided, respond to the followingquestions:

Compute the cost of each product under the simple/traditionalcosting method. For period costs, use the same basis of allocationas factory overhead.

Compute the net operating profit margin of each product usingthe simple/traditional costing method.

Categorize the production activities under activity-basedcosting according to the cost hierarchy. Indicate the type of costcategory that aligns with the activity.

Compute the total overhead and period cost allocation under ABCassumptions for each product.

Compute the per unit ABC cost of each product.

Compute the net profit margin of each product using the ABCcosting method.

Compare the net profit margin of the products under thesimple/traditional cost assignment and the ABC assignment for eachproduct. Evaluate the difference.

Write a brief explanation (approximately two paragraphs) thatSmith might deliver to management to justify the use of ABC forthese two products.

Your paper should meet the following requirements:

2-3 pages in length