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Problems on Customer Profitability and Service Department Cost Allocation

BBA406: Cost Accounting

Paola Conde

Jones International University

July 4, 2015

"10-55. Assigning Capacity Costs


Cathy and Toms Specialty Ice Cream Company operates a small production facility for
the local community. The facility has the capacity to make 18,000 gallons of the single
flavor, GUI Chewy, annually. The plant has only two customers, Chucks Gas & Go and
MarceesDrive & Chew Drive Thru. Annual orders for Chucks total 9,000 gallons and
annual orders for Marcees total 4,500 gallons. Variable manufacturing costs are $1 per
gallon, and annual fixed manufacturing costs are $27,000.
Required
What cost per gallon should the cost system report? Why? If you need more information
R/ The information need it is the reason why the owners bough a company with more
capacity that their need it; could be for 2 reasons, first because Ice cream is more in
demand in summer or because their planning to extend and do not want to pay for a
extension in the future. It is for a extension their should report the cost of 2.5 dollars x
gallon because that will benefit the company not the customer. If there are doing it
because the demand of ice cream is seasonal they can report 3 dollars per gallon for the
reason that the customer will be benefit of this.
capacity

Capacity 18.000

Chucks = 9.000
Marcees= 4.500
13.500

Variable
cost
Theoretical
capacity
Normal demand

18000
13500

18000
13500

Fixed
Cost
=18000+27000/18
1.5 000=
2
=13500+27000/13

2.5
3

500=