Specialty Chocolates Recently Expanded Its Operations Beyond Its Existing Kitchen

question 20

Multiple Choice

Specialty Chocolates recently expanded its operations beyond its existing kitchen to serve its retail operations by establishing a new kitchen to serve a wholesale market for local specialty shops.With this new arrangement,Specialty Chocolates will continue to have a retail shop attached to its original kitchen (Department 1) and the new wholesale operations shipping out of the new kitchen (Department 2) .Using normal costing,the company applies monthly overhead using predetermined overhead rates based on direct labor hours for the older operation in Department 1 and machine hours for overhead rates in the more automated Department 2.
$\begin{array}{lcc}&\text { Department } 1 & \text { Department } 2\\\text { Monthly estimated overhead allocated to each }\\ \text { department } & \$ 4,800 & \$ 6,000 \\ \text { Dverhead cost driver } & \text { direct labor hours } & \text { machine hours } \\\text { Estimated number of direct labor hours per } & 320 & -\\\text { month }\\ \text { stimated number of machine hours per month } & - & 500 \\\text { Estimated direct labor hours per pound of } & 10 \text { minutes } &\\\text { chocolate }\\\text {Estimated machine hours per pound of chocolate}&&\text {4 minutes}\end{array}$

Given this information,what are the respective overhead application rates to be used per pound of chocolate for Departments 1 and 2?

• A)Department 1: $1.50 per pound;Department 2: $0.20 per pound.
• B)Department 1: $0.25 per pound;Department 2: $0.20 per pound.
• C)Department 1: $2.50 per pound;Department 2: $0.80 per pound.
• D)Department 1: $0.25 per pound;Department 2: $2.00 per pound.
• E)None of the answer choices is correct.

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Definitions:

Shareholder Scrutiny

The analysis and evaluation of a company's performance and governance by its shareholders, often to assess the effectiveness, policies, and strategic direction of management.

Terminal Growth Rate

The rate at which a company is expected to grow its dividends or free cash flow beyond the forecast period, into perpetuity, during valuation.

Multi Stage Growth Model

A valuation method that applies different rates of growth to a company's earnings or dividends over various time horizons.

Discount Rate

The interest rate used to determine the present value of future cash flows.