Four the past four years, three companies have dominated the soft drink industry, holding a combined 85 percent of market share. Wonder Cola Inc., ranks second nationally in soft drinks sales. Its management is thinking about introducing a new low-caloric drink called Null Cola.
Wonder soft drinks are processed in a single department. All ingredients are added at the beginning of the process. At the end of the process, the beverage is poured into bottles that cost $0.24 per case produced. Direct labor and overhead cost are applied uniformly throughout the process.
Corporate controller Adam Daneen believes that costs foe the cola will be very much like those for the company’s Cola Plus drink. Last year, he collected the following data about Cola Plus:
Work in process inventory
January 1 (!)————————- 2,200
Direct material costs————————————— $ 2,080
Conversion Costs—————————————— 620
December 31 (!!) ———————- 2,000
Direct material costs————————————— 1,880
Conversion costs—————————————— 600
Units started during year 458,500
Costs for year
Liquid material added————————————– 430,990
Direct labor and overhead——————————— 229,400
Each unit is a 24-bottle case.
(!) 50% complete = January
(!!) 60%complete = December
The company’s variable general administration and selling costs are $1.10 per unit. Fixed administration and selling costs are assigned to products at the rate of $0.50 per unit. Each of Wonder Cola’s two main competitors is already marketing a diet cola. Company A’s product sells for $4.10 per unit; Company B’s, for $4.05. All costs are expected to increase by 10 percent in the next three years. Wonder Cola tries to earn a profit of at least 15 percent on the total unit cost.