Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow:
a Practical capacity less expected usage (all unused capacity is permanent).
b In some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity.
Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver.
a Costs associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver.
b These costs are for the actual levels of the cost driver.
1. Prepare a traditional segmented income statement, using a unit-level overhead rate based on direct labor hours. Using this approach, determine whether the cashew butter product line should be kept or dropped.
2. Prepare an activity-based segmented income statement. Repeat the keep-or-drop analysis using an ABC approach.