Question
In: Accounting
Bubba's Custom Shrimp Catering uses activity-based costing to determine the cost of its catering events. The...
Bubba's Custom Shrimp Catering uses activity-based costing to determine the cost of its catering events. The firm has two activity cost pools: cooking (activity rate is $500 per catering event) and serving (activity rate is $12 per plate). The firm currently has 25 catering events a year, with an average of 50 plates per event. It also incurs about $400 in direct costs for each event. The firm has four opportunities to improve its processes (listed below in the answer choices). None of these process improvements is expected to affect revenue. Each process improvement costs $2,500. Which of the following is the MOST profitable process improvement (read the answer choices carefully)? Selected Answer: c. Reduce direct costs per event by 25% Answers: a. Reduce the number of plates per event by 20%. b. Reduce serving activity rate by 25% c. Reduce direct costs per event by 25% d. Reduce cooking activity rate by 25%
Solutions
Expert Solution
AS PER MY COMPUTATION THE BEST WAY IS OPTION B
| COOKING COST PER CATERING | 500 |
| SERVICING COST PER PLATE | 12 |
| DIRECT COST PER EVENT | 400 |
| ANNUAL COST | |
| COOKING COST (25 CATERINGS*500) | 12500 |
| SERVICING COST(25 CATERINGS*50 PLATES*12) | 15000 |
| ANNUAL DIRECT COST(25 CATERINGS*400) | 10000 |
| TOTAL COST | 37500 |
| OPTION-A | |
| REDUCTION OF NUMBER OF PLATES BY 20% | |
| EFFECTIVE NUMBER OF PLATES(50*80%) | 40 |
| COOKING COST (25 CATERINGS*500) | 12500 |
| SERVICING COST(25 CATERINGS*40 PLATES*12) | 12000 |
| ANNUAL DIRECT COST(25 CATERINGS*400) | 10000 |
| 34500 | |
| OPTION-B | |
| REDUCTION OF SERVICE ACTIVITY RATE BY 25% | |
| EFFECTIVE SERVICING RATE(12*75%) | 9 |
| COOKING COST (25 CATERINGS*500) | 12500 |
| SERVICING COST(25 CATERINGS*50 PLATES*9) | 11250 |
| ANNUAL DIRECT COST(25 CATERINGS*400) | 10000 |
| 33750 | |
| OPTION -C | |
| DECREASE OF DIRECT COST 25% PER EVENT | |
| EFFECTIVE DIRECT COST PER EVENT(400*75%) | 300 |
| COOKING COST (25 CATERINGS*500) | 12500 |
| SERVICING COST(25 CATERINGS*50 PLATES*12) | 15000 |
| ANNUAL DIRECT COST(25 CATERINGS*300) | 7500 |
| 35000 | |
| OPTION -D | |
| DECREASE COOKING COST RATE BY 25% | |
| EFFECTIVE COOKING COST RATE(500*75%) | 375 |
| COOKING COST (25 CATERINGS*375) | 9375 |
| SERVICING COST(25 CATERINGS*50 PLATES*12) | 15000 |
| ANNUAL DIRECT COST(25 CATERINGS*400) | 10000 |
| 34375 | |
|
**COST OF IMPROVEMENT IS SAME HENCE IT IS NOT INCLUDED IN COST CALCULATION |
|
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