Cornerstone Group has, at your request, evaluated the indirect costs associated with Rockness Bottling's four cola lines and prepared the following report based on our findings. Our results utilize Activity-Based Costing ("ABC") rather than the Traditional method being employed. ABC enabled us to identify the drivers to the indirect costs (Appendix B section III), and more accurately allocate these costs across the product lines. Three appendices are attached to provide further details supporting our recommendations.
             Utilizing the ABC approach, we revised the gross margin report and the cost data by product line (Appendix A). While the Diet and Regular cola lines are profitable, the Cherry and Grape lines are not. Although Cherry is currently unprofitable, the line could have a positive gross margin with modifications to the production methods. The numbers are not so kind to the Grape line. The impact of Grape to gross margin is so overwhelmingly negative that we recommend discontinuing the line. The following provides supporting points and recommendations.
             The following process changes need to occur before the Cherry line can provide a positive impact to the Rockness Bottling's gross margin:
             • The production department should restructure the current setup process to eliminate non-value added processes. Cherry's production setup time is four times as long as Regular's (Appendix C note f). Currently, Cherry absorbs 43% of total production setup costs, and its efficiency output per hour of setup time nets 38 bottles/hour compared to Regular's 667. (Appendix C note g).
             • Management should explore decreasing the number of production runs while lengthening the production run times. Cherry averages 30 hours/run while Regular averages 133 hours/run (Appendix C note h). These shorter run times mean that Cherry produces only 300 units
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