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Using the information in Table MA.4, advise the marketing director on whether it

ID: 2573239 • Letter: U

Question

Using the information in Table MA.4, advise the marketing director on whether it

would be more beneficial to make fruit and nut bars rather than buy them in from

another company for £1.70 per bar. What other considerations need to be taken into

account?

Table MA.1 Volume chocolate bars

Selling price per bar £

Cocoa

grams per

bar

Sugar

grams per

bar

Milk

millilitres

per bar

Dark

80,000

2.00

170

30

0

Milk

140,000

1.80

130

40

30

White

60,000

2.00

0

70

130

Raw material costs

£4 per kg

£2 per kg

£1 per litre

Table MA.2

Indirect costs*

£k

Rent

18.2

Utilities

13.8

Factory administration

12.7

Marketing and sales

47.4

Administrative salaries

38.5

factory indirect costs are currently allocated on a blanket rate.

Packaging is estimated at £200 per 1,000 bars.

Direct labour costs are expected to be £10 per hour.

Table MA.3 Sales director’s volume and price assumptions

Increase price

Decrease volume

Dark chocolate bars

10%

10%

Milk chocolate bars

5%

5%

White chocolate bars

No change

No change

Table MA.4 Fruit and nut: raw material costs

Per bar

Quantity

Cost

Cocoa, sugar, and milk

Assume 50% of milk bar

Fruit

50g per bar

£4 per kg

Nut

50g per bar

£8 per kg

Direct labour, packaging,

and factory overhead

Cost per bar: use same assumptions

as other chocolate bars

Table MA.1 Volume chocolate bars

Selling price per bar £

Cocoa

grams per

bar

Sugar

grams per

bar

Milk

millilitres

per bar

Dark

80,000

2.00

170

30

0

Milk

140,000

1.80

130

40

30

White

60,000

2.00

0

70

130

Raw material costs

£4 per kg

£2 per kg

£1 per litre

Explanation / Answer

Marketing Director's Fruit and nut (make or Buy) Raw Materials /unit Cocoa---4/1000*65 0.26 Sugar ----2/1000*20 0.04 Milk---- 1/1000*15 0.015 Fruit---4/1000*50 0.2 Nut--- 8/1000*50 0.4 R/Mat.cost/unitTotal 0.915 Direct labor 1/20*$ 10 0.5 Total direct costs 1.415 Packaging 200/1000 0.2 Total variable costs 1.615 Incremental cost to make/bar 1.615 Purchase price from outside co. 1.7 savings /bar 0.085 BENEFICIAL to make. Other considerations in making: 1. Certainty that there is market for this product 2. Additional labor hours -- Unused capacity & alternate utilisation of employees ,or may have to face the displeasure of existing employees. 3. Assuming no increase in any fixed costs