Part A
Selling price per unit of candy = Revenue/Units sold = $7,500 ÷ 5,000 = $1.50
Selling price per unit of chips = $16,000 ÷ 8,000 = $2.0
The unit prices at 80% of the price paid by other customers
Unit price of candy = $1.50 × 80% = $1.20
Unit price of chips = $2.0 × 80% = $1.60
Variable costs (VC) per unit of candy and chips
VC per unit of candy = Variable costs/Units sold = $4,000 ÷ 5,000 = $0.8
VC per unit of chips = $8,800 ÷ 8,000 = $1.10
Incremental revenue
(1,000 × $1.20) + (1,500 × $1.60)
$1,200 + $2,400 = $3,600
Incremental cost
(1,000 × $0.8) + (1,500 × $1.1)
$800 + $1,650 = $2,450
Incremental profit = Incremental revenue – Incremental cost
Incremental profit = $3,600 - $2,450 = $1,150
The managers should accept the order from the potential customer because it leads to an incremental profit of $1,150
Part B
The other factors that the managers should consider before accepting the order are:
The reaction of the other customers if they learn that Junk Food Palace is selling its products at a cheaper price to select customers. The management should consider whether such an incidence would reduce the customers’ loyalty to their products.
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Whether they have the necessary labor to facilitate the production of the additional products. The management should consider whether there is a need to hire additional employees or if the current employees will be able to work extra hours.
The availability of materials required to produce the candy and chips. The managers should deliberate whether their suppliers will be in a position to deliver the requisite materials required for the production of the extra products.
Question 2
Part A
Cost of direct materials issued to production during May
| Particulars | Amount ($) |
| Raw materials inventory, May 1 | 160 |
| Add the: Raw materials purchased | 11,500 |
| Subtract the: Raw materials inventory, May 31 | (280) |
| Cost of direct raw materials issued to production during May | 11,380 |
Part B
Product cost amounts as of May 31
| Particulars | Amount ($) |
| Raw materials inventory, May 31 | 280 |
| Work in process inventory, May 31 | 240 |
| Finished goods inventory, May 31 | 950 |
| Total Inventory as of May 31 | 1,470 |
Description of the nature of each amount
Raw materials inventory bears the cost of raw materials on hand that are utilized in the manufacture of the finished goods.
Work in process inventory depicts the costs that are partially completed including the manufacturing overhead costs, direct labor costs amongst others.
Finished goods inventory bears the costs of the finished products that will be ready for sale as of May 31.
Question 3
Should Harry’s Sandwich Shop lower the selling price?
Solution
Current selling price = $6.25
Current per equivalent unit costs = $4.32
Subs sold in 2017 = 5,000
Gross profit for 2017 = $9,650
Reduced selling price = $5.80
Projected sales in 2018 = 5000 + 600 = 5,600 subs
Projected revenue from the sale of 5,600 subs each at $5.80 = $32,480
Costs Involved in production of 5600 subs
Direct material and direct labor are variable costs. Hence,
Direct material costs = No. of subs × Per equivalent direct material cost = 5,600 × $1.12 = $6,272
Direct labor costs = 5,600 × $1.76 = $9,856
Manufacturing overhead costs are fixed. Hence, they do not vary despite the increase in the production
Manufacturing overhead costs used in production of 5,600 subs = $7,200
Total costs used in the production of 5,600 subs = ($6,272 + $9,856 + $7,200) = $23,328
Projected gross profit in 2018 = (5,600 × $5.80) - $23,328 = $9,152
The gross profit in 2017 was $9,650, thus the reduction in the selling price of the sandwiches would result in a decrease in the profits by $498 which is calculated as:
($9,650 - $9,152) = $498
Consequently, Harry’s should not lower the selling price since the decrease would result in a decrease in the gross profit.
Question 4
Part A: Using the High-low Method
Variable cost per rider
Identify the highest and lowest level activities
Highest level is in the month of March with 4,200 riders and operating costs of $11,130
Lowest level is in the month of January with 2,500 riders and operating costs of $7,475
Variable cost per rider = Operating expenses at highest level – operating expenses at lowest level) ÷ (Number of riders at highest activity – Number of riders at lowest activity)
Variable cost per rider = ($11,130 - $7,475) ÷ (4,200 – 2,500) = $2.15
The variable cost per rider = $2.15
Fixed costs per month
Use the lowest level of activity to determine the fixed costs per month
Fixed cost = Operating costs at lowest activity – total variable costs at this activity level
Fixed cost = $7,475 – ($2.15 × 2,500) = $2100
The cost Equation
Total cost (TC) = Total variable cost + Fixed cost
Variable cost per rider = $2.15
Fixed cost = $2,100
TC = 2.15*x + 2,100
Where;
TC = total cost
x = number of riders
Part B
Number of customers to generate $4,190 profit per month
Net profit = Total revenue – Total cost
Let the no. of customers be x
The total revenue will be = $4 * x
Total costs will be = 2.15x + 2,100
4190 = 4 * x – (2.15*x + 2,100)
4,190 = 4x – 2.15x – 2,100
1.85x = 6,290
x = 6,290/1.85 = 3,400
The number of customers required is 3,400 riders each month
