#4 We just made what we thought was another fabulous barrel of beer. We bottled,
ID: 2561626 • Letter: #
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#4 We just made what we thought was another fabulous barrel of beer. We bottled, packaged, and shipped it to customers only to find out that we put too much CO2 in the bottles. Although the beer is good, when the customers open them, they are very foamy! Our customers are not happy and would like to either throw the beer away or have us to pick up the beer. If we pick up the beer, we can sell it at the brewery as seconds. What costs are relevant to set a minimum selling price for the beer if we sell it from the brewery. (RELEVANT COSTS)
One case of Pale Ale per unit Selling price $25 current volume 26,000 cases (24 beers in a case) malts $2.60 hops $2.40 yeast $0.50 packaging $5.00 *other production costs $4.50 *5 gallons of water for every gallon of beer, CO2, utilities, taxes shipping $1.75 selling $1.25 total variable costs $18.00 total fixed up to 28,000 capacity Salary brewer $1.15 $30,000.00 Salalry driver $0.77 $20,000.00 rent $1.92 $50,000.00 truck $0.92 $24,000.00 promotion exp $0.19 $5,000.00 total costs $22.96#4 We just made what we thought was another fabulous barrel of beer. We bottled, packaged, and shipped it to customers only to find out that we put too much CO2 in the bottles. Although the beer is good, when the customers open them, they are very foamy! Our customers are not happy and would like to either throw the beer away or have us to pick up the beer. If we pick up the beer, we can sell it at the brewery as seconds. What costs are relevant to set a minimum selling price for the beer if we sell it from the brewery. (RELEVANT COSTS)
Explanation / Answer
In this case you want to sell the beer from the brewery and hence relevant costs will be those costs that can be avoided if the decision to sell from brewery is not implemented.
Here the fixed expenses of brewer’s salary, driver’s salary, rent, truck expenses, and promotion expenses are irrelevant as they will be incurred irrespective whether the beers are sold as seconds at the brewery or not.
The relevant costs are those costs that will be avoided if the beer is not sold as seconds. The beer has already been manufactured and so the costs of materials and packaging and other production costs are irrelevant.
Shipping cost is the only relevant cost because if we pick up the beer, only shipping cost will be changed by picking it up. Packaging, other production costs, and selling costs are not relevant because they are sunk costs.
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