Juice producer

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Upon request, the interviewer can provide the following information:

• Price per unit was $2.00 for the 16-ounce product.
• After investing in the new machine, prices have been increased by $0.50 for each product.
• This means that the 16-ounce has a price tag of $2.50 and the 32-ounce $4.00 respectively.
• 60% of total sales come from the 32-ounce and 40% come from the 16-ounce.
• The plastic 32-ounce container costs more to produce since it required a new machine and more specialized labor.
• As for remaining overhead, the producer just sums them up and divides them across all units produced for both products.

• The candidate should ask for data on the pricing of both products, before and after investing in a new machine.
• Candidate should also ask for a sales breakdown between the two products.
• Candidate should ask for the unit costs for both products.
• Candidate should ask how the cost per unit is calculated by the client.

The candidate should be able to explain the overall situation based on the information above. The following insights can be drawn from that information:

• Firstly, sales per ounce are lower for the 32-ounce product than it is for the 16-ounce product.
• Secondly, it costs more to produce the 32-ounce product, but we're not making more money on it in terms of sales.
• Thirdly, overheads are divided across all products when there should be specific cost-allocation measures that clients should use.
• So we're selling more 32-ounce units that have a higher cost, but the pricing per ounce is lower than the cheaper 16-ounce product.

This means that for every 32-ounce we sell, we lose profit since that product is a low-margin product.

This is a clear case of not allocating the proper costs to the proper product and pricing it accordingly. The client should conduct a thorough cost analysis and allocate costs to the right product and adjust pricing.

Applying ABC costing is a good approach here.