Cost accounting: relevant costs & revenues Example One Jiaqico has the following
ID: 2515927 • Letter: C
Question
Cost accounting: relevant costs & revenues Example One Jiaqico has the following information: Cookies 640 800 S6 S2 $1,100 Brownies Current Volume (boxes) Capacity 750 $7 $2.50 $200 Sales Price Variable Costs Monthly Fixed Costs Cookies Fixed Costs include an allocation of $200 per month of depreciation on ovens and Brownies Fixed Costs include an allocation of $50 per month of depreciation on ovens. All other fixed costs are division-specific and would be eliminated instantly if the division were discontinued Treat each of the following situations separately. 1. Efremco has offered to buy 400 boxes of cookies each month for $5 per box. If Jiaqico accepts this offer, it will eliminate $300 per month in advertising costs. Should Jiaqico accept Efremco's offer? 2. Melvaco has offered to buy 100 boxes of brownies from Jiaqico each month. Melvaco's purchase will not affect Jiaqico's other sales or fixed costs, but it will increase its variable costs $0.50 per box. This increase arises because Melvaco wants the brownies made with a special kind of fine-quality chocolate. What is the minimum price Jiaqico should charge Melvaco for this special order? 3. Marianneco has offered to provide brownies to Jiagico so Jiaqico would only make cookies. Marianneco will charge Jiagico $3,60 per box. Should Jiaqico accept the offer? 4 Jiagico is considering frosting 200 boxes of brownies each month. Total sales of brownies would not increase, it would sell 300 boxes of unfrosted brownies and 200 boxes of frosted brownies each month. The frosted brownies would sell for $8.50 per box. The frosting would cost $0.60 per box of brownies, and direct labor costs would increase by $0.40 per box. Jiaqico plans a promotional campaign for the new frosted brownies that will cost $220 per month. Should Jiagico frost the brownies? 5. Create contribution-format income statements for each situation described aboveExplanation / Answer
Contribution format Income statement for current situation Current Volume 640 500 Cookies Per unit Brownies Per unit Sales 3840 6 3500 7 Variable costs 1280 2 1250 2.5 Contribution 2560 4 2250 4.5 Fixed costs less allocated fixed cost 900 150 Operating Income 1660 2100 Contribution format Income statement for utilising extra capacity Cutting off current volume Sales to Outsiders Total Units 160 240 400 800 Total Per unit Total Per unit Total Per unit Situation 1 Sales 800 5 1200 5 2400 6 4400 Variable costs 320 2 480 2 800 2 1600 Contribution 480 3 720 3 1600 4 2800 Fixed costs 600 Operating Income 2200 Yes, Jiaqico should accept this offer, as net operating income in this situation is higher than current situation for Cookies. Situation 2 The Minimum price the Jiaqico should charge is anything greater than or equal to its variable cost of making Brownies This is due to fact that its fixed cost are already getting absorbed in the current production and there is spare capacity. Existing variable cost of brownies 2.5 Add : Increased in variable cost due to fine quality chocolate required by Melvaco 0.5 Total variable cost or Minimum price to be charged 3 Siatuation 3 To eveluate the Marrianneco's offer we need to find the total cost per unit of Brownies and compare this cost with offer price of Marrianneco. Current volume of production of Brownies 500 Variable cost 2.5 Total variable cost 1250 Add : Fixed cost 150 Total cost 1400 Total cost per unit 2.8 No, Marrianneco's offer should not be accepted at current level of production of cookies as cost per unit of brownies is less than that offered by Marrianneco. However if sales volume deepens very much in future, it might think about it. Situation 4 Unfrosted brownies Frosted brownies Total Units 300 200 500 Total Per unit Total Per unit Sales 2100 7 1700 8.5 3800 Variable costs 750 2.5 700 3.5 1450 Contribution 1350 4.5 1000 5 2350 Fixed costs 370 Operating Income 1980 No, Jiaqico should no frost the Brownies, as it is receiving less operating income compared to operating income under current production volume without frosting.