Company produces and sells 55 comma 00055,000 boxes of specialty foods each year
ID: 2337335 • Letter: C
Question
Company produces and sells
55 comma 00055,000
boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual costs:
Cost Item
Total Costs
Variable production costs
$330,000
Fixed production costs
520,000
Variable selling costs
165,000
Fixed selling and administrative costs
160,000
Total costs
$1,175,000
GarrardGarrard
normally charges
$ 21$21
per box. A new distributor has offered to purchase
5 comma 5005,500
boxes at a special price of
$ 17$17
per box.
GarrardGarrard
will incur additional packaging costs of
$ 1$1
per box to complete this order.
Requirements
(a)
GarrardGarrard
5 comma 5005,500
GarrardGarrard's
(b)
5 comma 5005,500
GarrardGarrard
1 comma 5001,500
GarrardGarrard's
5 comma 5005,500
Requirement (a) Suppose
GarrardGarrard
has surplus capacity to produce
5 comma 5005,500
more boxes. What will be the effect on
GarrardGarrard's
income if it accepts this order?
Select the items that are relevant if the order is accepted, then calculate the effect on income. (Only complete the necessary answer boxes. Use parentheses or a minus sign for a net decrease in income.)
in income
Cost Item
Total Costs
Variable production costs
$330,000
Fixed production costs
520,000
Variable selling costs
165,000
Fixed selling and administrative costs
160,000
Total costs
$1,175,000
Explanation / Answer
A)
Variable Production cost per box :-
= Variable Production Cost / No. of Box Produces and Sells
= $330000 / 55000
= $6 per Box
Variable Selling cost per box :-
= Variable Selling cost / No. of box Produces and Sells
= $165000 / 55000
= $3 Per Box
Incremental Variable Cost per box :-
= Variable Production Cost + Variable selling Cost + Additional Packaging Cost
= $6 + $3 + $1
= $10
Incremental Variable Cost :-
= No. of Boxes for Special Order * Incremental Variable Cost Per Box
= 5500 * $10
= $55000
Incremental Contribution Margin :-
= Incremental Revenue - Incremental Variable Cost
= (5500*$17) - $55000
= $93500 - $55000
= $38500
B) Effect on income if the capacity of production is Reduced by 1500.
Unused Capacity :-
= Actual Capacity - Production Capacity
= 5500 - 1500
= 4000 Boxes
Opportunity cost per box :-
= Normal Price - (Variable Production Cost + Variable Selling cost per box)
= $21 - ($6 + $3)
= $21 - $9
= $12
Opportunity cost :-
= Unused Capacity * Opportunity cost per box
= 4000 * $12
= $48000
Increase in Incremental Contribution margin :-
= Incremental Contribution Margin - Opportunity Cost
= $38500 - $48000
= ($9500)
If it accepts this order, Garrard will earn Loss of $9500
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