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:
- Units* Costs
- Work in process inventory
- January 1 (!)------------------------- 2,200
- Direct material costs--------------------------------------- $ 2,080
- Concersion 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
- Bottles--------------------------------------------------- 110,068
Each unit is a 24-bottle case.
(!)50% complete = January
(!!)60%complete = December
The compamy'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 manin 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.
1. What factors should Wonder Cola, Inc., consider in setting a unit selling price for a case of Null Cola?
2. Using the FIFO costing method, compute (a) equivalent units for direct materials, cases of bottles, and conversion costs; (b) the total production cost per unit; and (c) the total cost per unit of Cola Plus for the year.
3. What is the expected unit cost per unit of Cola Plus for the year?
4. Recommend a unit selling price range for Null Cola, and give the reason (s) for your choice.