South Dakota Microbrewery Case

Group 9:
1. Hong ng Hng 2. L Qun 3. Phm Hng Vn 4. L Th THu Trang 5. Nguyn Qunh Loan 6. Trng Hong Yn 7. Trn Th Hng Phng 8. Nguyn Tin c

Question 1: a. Plant-wide allocation base system Predetermined overhead rate =

$116,750 7500 direct labor - hours

=$15.57 per direct labor-hours

Product cost estimate

Buffalo Ale Direct material cost (1) Direct labor cost (2) Direct labor hours(3) Predetermined overhead rate (4) Manufacturing Overhead cost (5) = (3) x (4) Total cost (6) = (1)+(2)+(5) Total bottles (7) Cost per bottle (8) = (6) / (7) 280.26 62.60 108.00 18 hrs Bismarck Bock 88.95 72.00 12 hrs $15.57 per DLH 186.84 202.41 Four Heads Stout 89.55 78.00 13 hrs

450.86 528 $0.85

347.79 384 $0.91

369.96 432 $0.86

b. Activity-based cost system The activity rates for the activity cost pools are: Activity Total activity volume (1) 2,910 7,500 82,700 3,740 4,850 229,920 Estimated cost (2) Activity rate (3)=(2)/(1)

Fermentation Days Direct Labor Hours Machine Hours Number of Orders Number of Quality Control Inspections Number of Bottles Produced

38,000 7,500 5,500 31,250 10,500 24,000

$13.06/day $1.00/hour $0.07/hour $8.36/order $2.16/time $0.10/bottle

Unit product cost applied to activity-based cost system:

Buffalo Ale Activity cost pool Activity Volume 3 18 110 2 5 528 Assigned cost 39.18 18.00 7.70 16.72 10.80 52.80 $145.20 Bismarck Bock Activity Volume 14 12 325 18 22 384 Assigned cost 182.84 12.00 22.75 150.48 47.52 38.40 $454.99 Four Heads Stout Activity Volume 4 13 135 9 8 432 Assigned cost 52.24 13.00 9.45 75.24 17.28 43.20 $210.41

Fermentation Days ($13.06/day) Direct Labor Hours ($1.00/hour) Machine Hours ($0.07/hour) Orders ($8.36/order) Quality Control ($2.16/time) Bottle ($0.10/bottle) Total manufacturing overhead cost

Direct material cost (1) Direct labor cost (2) Total Cost Number of bottles Cost per bottle

62.60 108.00 $315.80 528 $0.60

88.95 72.00 $614.94 384 $1.60

89.55 78.00 $377.96

432 $0.88

Question 2: Advantages and disadvantages of each system for SDM: The plant-wide allocationThe activity-based cost system based on direct labor hours Simple The estimated unit price is closely related to the real value Easy to calculate Advantages Applicable to big Applicable to small-sized companies with a smallcompanies with large number of product lines number of product lines Inaccurate becauseComplicated different products havecalculation on unit price different level of resource depreciation the estimated unit price does not reflect exactly the real value

Disadvantages

Question 3: 1. Plant-wide allocation base model

Buffalo Ale Expected batches sold (1) Number of Bottles per Batch (2) Expected Bottles sold (3) = (1) x (2) Cost per bottle Selling price per bottle (4) Net income per bottle Net income per product

Bismarck Bock

Four heads Stout

250

120

120

528

384

432

132,000 $0.85 1.05 0.20 $26,400

46,080 $0.91 1.50 0.59 $27,187

51,840 $0.86 1.40 0.54 $27,994

Total net income = $26,400 + $27,187 + $27,994 = $81,514

2. ABC model Buffalo Ale Expected batches sold (1) Number of Bottles per Batch (2) Expected Bottles sold (3) = (1) x (2) Cost per bottle Selling price per bottle (4) Net income per bottle Product margin Bismarck Bock Four heads Stout

250

120

120

528

384

432

132,000 $0.60 1.05 0.45 $59,400

46,080 $1.60 1.50 (0.1) $(4,608)

51,840 $0.88 1.40 0.52 $26,957

Total net income = $59,400 $4,608 + $26,957 = 81,749 Question 4: What price should South Dakota Microbrewery charge for each of its three products? Justify your answer with supporting arguments and analysis. 1. Current situation In accordance with the information mentioned in the case, we have collected the outstanding data and the suggested solutions below: -Buffalo Ale is sold primarily to bars in college town that order fairly large shipments and some beers prices are fluctuating substantially. Furthermore, Ale prices have been falling throughout the market. On the other hand, the Ales selling price is high enough to gain profit. Therefore, $1.05 is a reasonable price to the market. - When it comes to the second product, Bismarck Bock, we have found that there was no apparent market response to 10% increase in price of this beer. In addition, the selling price is lower than the cost. Hence, we might set a new price which is 15 or 20% higher than former one. It should be
$1. 5 x120 % = = $1.64 per bottle. However, we have to 110 %

keep an eye on feedbacks from the market.

We should make no change in the price of Four Heads Stout due to no related

significant data and the price is in the practical and profitable level.

Question 5:

Product cost estimate using ABC model

Buffalo Ale Cost per bottle Selling price per bottle Product margin $0.60 $1.05 $0.45 Bismarck Bock $1.60 $1.50 ($0.1) Four heads Stout $0.88 $1.40 $0.52

- The given table shows us the problem in pricing strategy of SDM that the selling price of Bismarck Bock is lower than the cost. Therefore, we should increase the price in a gentle level in order to prevent negative responses from the market. - We should have a consideration in reducing the quantity of Bismarck Bock produced due to the high cost per bottle in comparison with the others. If there is no increase in demand from upscale restaurants and hotel, we may either reduce or maintain the current production capacity. Another reason is that the product margin of Bismarck Bock is quite low, even though we increase the selling price. - It should be considered that there is a need to raise the Buffalo Ale quantity produced due to the following reasons: + There is a great demand from the bars with reasonable price in compliance with the majority of people. + Computed cost per bottle by using ABC model is lower than traditional one. Additionally, it has the lowest cost compared with the two others. - We must not reduce the fund for the activities such as quality control, fermentation day because it can affect the quality of the product.