Reference no: EM131912704

The owner of Duck brewery says:

"We just went through a process of looking through our costs in excruciating detail. We were actually selling one brand, Nut Ale, below cost. From an ingredient basis, it's the cheapest beer we make, so I was charging less for it. But ingredient cost is such a small portion of the cost of beer. Labor and overhead are much bigger. I didn't have a precise number for any of the costs at all; I just made a wild guess."

I interpret the comment to mean that the owner now believes the original cost estimate (the "wild guess" based on the cost of ingredients) was too low, and that some recent analysis has provided "better" information about the cost of Nut Ale (and, presumably, all such products made at the Duck Brewery).

Note that the owner already has new and improved cost information!

Respond to the following:

1. Explain why the owner's assumption that "total unit cost (including all appropriate resources) is proportional to direct materials cost" is not a safe assumption.

2. Explain the implication for the original reported unit cost of at least one other Duck Brewery product given the owner's new understanding of the accuracy of the reported unit cost of Nut Ale.