Performance Drinks, LLC is owned by Dave N. Port. Performance Drinks produces a variety ofsports centered drinks. They beganoperations in 1993 shortly after Mr. Port graduated with his M.B.A. fromDavenport University. The company sawearly success as sports and fitness nutritional products gained new popularityin the 1990’s. Financially the companyis sound and has been wise in controlling their growth over the years. However, within the last 18 months Mr. Porthas noticed a drop in overall company profitability. This is especially troubling considering thatthe company has continued to experience top-line growth. Mr. Port and his management team have beenconsidering developing a new product line. However, those plans have been put on hold until they can figure out whytheir profits are shrinking. PerformanceDrinks makes four different kinds of sports drinks. Those drinks are as follows:BasicHydrationIntensityPost-WorkoutEach of these drinks contains a slightly differentnutritional profile and is targeted for different users and uses. The Basic drink has the least nutritionalbenefit and is targeted for general consumption. The Hydration product targets enduranceathletes and specializes in hydration replacement. The Intensity product was designed withenergy enhancement in mind. It serves the needs of extreme athletes who needlong durations of sustained energy. Lastly, the Post-Workout product is a nutritional replacement productthat is generally used following exertion. You arethe Controller for Performance Drinks. You feel as though you have a good handle on the financial reporting andthe overall company performance. However, admittedly, your accounting information system has beendesigned to serve the needs of external users from an aggregateperspective. To that end you utilizeabsorption costing exclusively within the organization. You recall studying the concept of ActivityBased Management (ABM) and Activity Based Costing (ABC) while taking amanagerial accounting course. You wonderif applying those ideas to your business would help to uncover the mystery ofthe disappearing profits. Yourecall from your Management Accounting class that product costs are comprisedof:Direct MaterialsDirect LaborManufacturing OverheadYou don’t suspect that anything strange is going with yourdirect costs. You do wonder, however, ifa more thorough understanding of your indirect costs may be in order. Over a series of weeks you talk with avariety of employees, representing a multitude of functional areas, from withinthe company. During those conversationsyou take careful note on what activities might be consuming resources and howthose activities might be measured. Yousharpen your pencil and begin to unpack what you’ve learned. You start with reviewing last month’sProduct-Level Profit Report. That reportis following:Since your primary area of focus is on the indirect costs youcompile the following report which further details your overhead charges:Overhead Activities:Using traditional costing methods, which support yourabsorption costing system, you base overhead allocation on direct laborcost. Furthermore, “fringe benefits” area function of direct labor cost. As a result of your many meetings to discuss companyoverhead you determine that the majority of your indirect costs are related tofour primary activities. Thoseactivities are equipment set-ups, production runs, production management andmachine-hour capacity. “ProductionManagement” refers to a number of items that are correlated to the number ofproducts the company produces. Ultimatelyyou determine that your key activities have the following usage patterns, asthey pertain to the monthly overhead costs: Upon reviewing budget data fromthe last budget cycle you discover that the monthly number of set-ups wasestimated to be 85. The number ofproduction runs was estimated to be 250. That monthly machine-hour capacity is presently at 20,000machine-hours. Lastly, PerformanceDrinks produces a total of four products. Aftertalking with the Plant Manger you create the following usage data relative toproducts and activities:Requirements:1. Based on all of the date provided, compute the costdriver rates for each of the four activities.2. Compute the per unit product costs for each of the fourproducts. Compute this cost using ABC allocation for overhead. Show the computation for each per unit productcost in detail.3. Prepare a “Monthly Profit Report”, like the one providedon page 4 of this packet. Create thisreport using the results of your ABC overhead allocation.4. Prepare a written “Management Report” that explains tothe management team what Activity Based Costing is, how it was used to generatethe Monthly Profit Report (from requirement #3). Explain why the profit for each product isdifferent when comparing the Traditional report with the ABC report. Explain what the company might considerdoing, based on all of this information, to stop the erosion of companyprofits. Defend your recommendationswith data. Additional Consideration: Mr.Port wonders what would happen to costs if plant capacity was shifted from20,000 machine-hours a month to 40,000 machine-hours per month.Requirements:5. Compute the new cost per unit for each of the productsconsidering the increase in capacity. Show the computation for each per unit product cost in detail.6. What is the cost of the unused capacity if it is assumedthat the company has 40,000 machine-hours of capacity but it using 20,000machine-hours? Amend your “ManagementReport” to include a discussion on how to best use the additional capacity.Clarification on format and data: Clearcommunication and professionalism are important. Defending your answer with data is important. An electronic copy of this Case (this document) is availablewithin Blackboard. Additionally, anExcel file, containing the basic data for the case will be available withinBlackboard.You will create one professional report. In that report you should clearly label allof your answers. Make your answers easyto read and find. Imagine you weregiving this report to your boss. Furtherimagine you have to lead your boss and the executive team through yourfindings. As it pertains to requirement #4, include the “ManagementReport” inside your overall report. Youwill then have one Word document as your final product. You will also have oneExcel file.Grading is based on both accuracy (see rubric) and yourability to communicate your answers professionally and clearly.Use the following naming structure for your files: lastname_first initial_case2.docx. Of courseyour Excel file will have an .xls suffix. Double space your report.Put good thought into how you organize your Excel document. Partof your grade will be based upon the usability and layout of your Excel file.Imagine that have to give the electronic copy of your Excel file to your boss,or a peer, to work with. Imagine thatyou could not coach them at all on how to use your file. Is your file organized and labeled so clearlythat anyone could use it, easily, without instructions from you? You want to strive for that kind of clarityin your work.Your report should have a title page. Use APA 6th editionfor guidance on title pages.You will physically hand-in your report. You will alsoupload to Blackboard both your Word document and your Excel file.Due date: Tuesday, October 8th at 6:00 PM EDTLate submissions will result in the following: 10% reduction in score for each 24 hourperiod of being late (up to 3 days). After 3 days late zero credit will be earned.As always please come to me with learning questions. Thisproject is a learning experience. Rubric:This project is worth 20% (200 points) of your overallcourse grade. I will convert your scores to a 200 point scale.
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