Poppycrock, Inc., manufactures large crates of microwaveable popcorn that are ty
ID: 2557917 • Letter: P
Question
Poppycrock, Inc., manufactures large crates of microwaveable popcorn that are typically sold to distributors. Its main factory has the capacity to manufacture and sell 35,000 crates per month. The following information is available for the factory 28.00 Sales price per crate Direct materials Variable overhead Variable cost per crate: 5.50 10.50 3.70 $102,000.00 Direct labor Fixed costs per month Boys and Girls of Canada is a not-for-profit organization that raises funds each year by selling popcorn door-to-door. It offers to pay Poppycrock $22 per crate for a special-order batch of 5,000 crates. The special-order popcorn would include a unique label with information about the Boys and Girls of Canada. The additional cost of the label is estimated at $1.00 per crate. In addition, the variable overhead for these special-order crates would decrease by $0.50 because there would be no distribution costs a. What is the incremental cost of creating a normal crate of popcorn? A special-order crate of popcorn? (Round your answers to 2 decimal places.) b-1. What is the impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and distributing 30,000 normal crates per month? b-2. What is the opportunity cost of not accepting the offer? c-1. What is the impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and selling 35,000 normal crates per month? c-2. What is the opportunity cost of accepting the offer?Explanation / Answer
Solution a:
Incremental cost of creating a normal crate of popcorn = $5.50 + $10.50 + $3.70 = $19.70
Incremental cost of creating a special order crate of popcorn = $5.50 + $10.50 + $3.20 + $1 = $20.20
Solution b1:
As Poppycrock is having capcity to manufacture 35000 crates per month and it currently selling only 30000 crates, therefore there will be no loss of regular sale if special order is accepted.
Contribution per unit from special order = $22 - $20.20 = $1.80
Net increase in monthly operating profit if Poppycrock accept the special order = 5000 * $1.80 = $9,000
Solution b2:
If Poppycrock will not accept the special order then it will loose additional contribution margin of $9,000. Therefore opportunity cost of not accepting the offer = $9,000
Solution c1:
As Poppycrock is having capcity to manufacture 35000 crates per month and it currently also selling 35000 crates, Therefore on acceptance of special order, Poppycrock have to loose regular sale of 5000 crates
Loss of contribution from regular sales = ($28 - $19.70) * 5000 = $41,500
Contribution per unit from special order = $22 - $20.20 = $1.80
Contribution from special order = 5000 * $1.80 = $9,000
Impact on poppy crock's monthly operating profit if it accepts the offer = $9,000 - $41,500 = -$32,500
Hence net operating profit will decrease by $32,500 on accepting special order.
Solution c2:
Opportunity cost of accepting the offer is loss of contribution from normal sales = $41,500