The Delmar Beverage Co. produces a premium root beer that is sold throughout its

Question

The Delmar Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is currently producing 4,000 gallons of root beer per day, which represents 80% of its manufacturing capacity. The root beer is available to restaurant customers by the mug, in bottles, or packaged in six-packs to take home. The selling price of a gallon of root beer averages $10, and cost accounting records indicate the following manufacturing costs per gallon of root beer. Raw materials

Explanation / Answer

a) Since all the variable costs are the only ones which are relevant,

The relevant costs per gallon are:

Raw materials3.20

Direct labor1.60 Variable

overhead1.00

Distribution cost $.70

Total relevant cost/ gallon = $6.50

b) If Delmar accepts the offer, It earns ($ 7.70 - $6.50)* 600 = $ 720 more.
Hence, it’s operating income increases by $120

c) If Delmar produces 5000 gallons a day,

The relevant costs are:

The relevant costs per gallon are:

Raw materials3.20

Direct labor1.60 Variable

overhead1.00

Distribution cost $.50 for normal orders, $0.70 for special orders

It earns ($ 10 - $ 8.50 )*4000 + $($ 10 - $ 6.30 )*1000 = $9700

If it accepts the offer,

It will earn ($10 - $ 8.50 )*4000 + $($ 10 - $ 6.30 )*400 + ($7.70 - $6.50)*600 = $8200

Hence, operating income decreases by $1500

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