ZigZag Cola produces a lemon-lime soda. The production process starts with workers mixing the lemon syrup and lime flavors in a secret recipe. The company enhances the combined syrup with caffeine. Finally, the company dilutes the mixture with carbonated water. ZigZag Cola incurs the following costs (in thousands): Plant janitors' wages $ 900
Delivery truck drivers' wages $ 275
Payment for new recipe $ 1,300
Depreciation on delivery trucks $ 175
Plant utilities $ 650
Lime flavoring $ 1,180
Rearranging plant layout $ 1,600
Bottles $ 1,040
Salt 50
Sales commissions $ 325
Production costs of "cents-off' store coupons for customers $ 770
Lemon syrup $ 16,000
Replace products with expired dates upon customer complaint $ 70
Depreciation on plant and equipment $ 2,700
Wages of workers who mix syrup $ 7,800
Customer hotline $ 180
Freight-in on materials $ 2,000
Requirements 1, 2 and 3. Classify each of these costs according to its category in the value chain and further break down production costs into three subcategories: Direct Materials (DM), Direct Labor (DL), or Manufacturing Overhead (MOH). Compute the total costs for each value chain category.

Zig Zag Cola

1. Classification of costs according to their category in the value chain:

a. Inbound logistics (relationship with suppliers):

New recipe                                       $ 1,300

Lime flavoring                                   $ 1,180

Bottles                                              $ 1,040

Salt                                                        $ 50

Lemon syrup                                 $ 16,000

Freight-in on materials                  $ 2,000

Total cost of Inbound logistics = $21,500

b. Operations:

Wages of workers who mix syrup     $ 7,800

Plant janitors' wages                             $ 900

Plant utilities                                          $ 650

Rearranging plant layout                    $ 1,600

Depreciation on plant & equipment $ 2,700

Total cost of Operations =               $13,650

c. Outbound logistics:

Delivery truck drivers' wages     $ 275

Depreciation on delivery trucks  $ 175

Total outbound logistics cost     $450

d. Marketing and sales:

Customer hotline                           $ 180

Sales commissions                       $ 325

Sales coupons for customers      $ 770

Total marketing and sales cost $1,275

e. Service:

Customer hotline                         $ 180

Sales coupons for customers     $ 770

Product Replacement                   $ 70

Total costs of Services            $1,020

2. Subcategories of Production Costs:

Direct Materials:

New recipe        $ 1,300

Lime flavoring    $ 1,180

Bottles               $ 1,040

Salt                         $ 50

Lemon syrup  $ 16,000

Freight-in

on materials   $ 2,000

Cost of materials $21,500

Direct Labor:

Wages of workers who mix syrup $ 7,800

Total cost of direct labor                $ 7,800

Manufacturing Overheads:

Plant janitors' wages                             $ 900

Plant utilities                                          $ 650

Rearranging plant layout                    $ 1,600

Depreciation on plant & equipment  $ 2,700

Total Overheads                                  $ 5,85

Explanation:

a) Data and Calculations:

Costs incurred (in thousands)

Direct Materials:

New recipe        $ 1,300

Lime flavoring    $ 1,180

Bottles               $ 1,040

Salt                         $ 50

Lemon syrup  $ 16,000

Freight-in

on materials   $ 2,000

Cost of materials $21,500

Direct Labor:

Wages of workers who mix syrup $ 7,800

Total cost of direct labor                $ 7,800

Manufacturing Overheads:

Plant janitors' wages                             $ 900

Plant utilities                                          $ 650

Rearranging plant layout                    $ 1,600

Depreciation on plant & equipment $ 2,700

Overheads                                         $ 5,850

Selling and Distribution Expenses:

Depreciation on delivery trucks  $ 175

Delivery truck drivers' wages     $ 275

Sales commissions                      $ 325

Customer hotline                         $ 180

Sales coupons for customers     $ 770

Product Replacement                   $ 70

Selling and Distribution costs   $1,795

b) ZigZag's value chain activities, according to Michael Porter, include inbound logistics, operations, outbound logistics, marketing and sales, and service. These activities create value that exceeds their cost for the purpose of generating a higher profit.  In a similar way, ZigZag's production costs can be categorized into direct materials, direct labor, and manufacturing overhead.

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