Question

1. A) Canned foods unlimited is trying to decide whether to sell its canned corn in whole kernels or process it further into creamed corn. The cost of producing whole kernel corn is $0.20 per can, and the can sells for $0.75. Additional processing costs to produce creamed corn are $0.10 per can, and each can sells for $0.89. If the corn is processed further and 10,000 cans are sold as craemed corn rather than whole kernel corn, what is the effect on net income?

B) Canned foods unlimited also sells hand-made frozen treats at various community events for $3.00 each. The costs associated with each treat are estimated at $1.70 of variable costs and $0.40 of fixed overhead costs at the current level of sales. A youth group, whose members attend spoting events once a year, wishes to buy 150 treats for $2.00 each from Canned foods unlimited at an upcoming softball outing. By what amount would net income be increased of decreased if the special order is accepted? What is the minimum price that could be charged for this special product?

Answer 1

1. A) Canned foods unlimited is trying to decide whether to sell its canned corn in whole kernels or process it further into creamed corn. The cost of producing whole kernel corn is $0.20 per can, and the can sells for $0.75. Additional processing costs to produce creamed corn are $0.10 per can, and each can sells for $0.89. If the corn is processed further and 10,000 cans are sold as craemed corn rather than whole kernel corn, what is the effect on net income?

Incremental revenue each can            $0.14 (0.89 – 0.75)

Less: Incremental cost                                    $0.10

Incremental contribution margin        $0.04

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Number of cans to sell                                    10,000

Increase in net income                                    $400

Since there is an increase in net income, further processing can be carried out.

1. Canned foods unlimited also sells hand-made frozen treats at various community events for $3.00 each. The costs associated with each treat are estimated at $1.70 of variable costs and $0.40 of fixed overhead costs at the current level of sales. A youth group, whose members attend spoting events once a year, wishes to buy 150 treats for $2.00 each from Canned foods unlimited at an upcoming softball outing. By what amount would net income be increased or decreased if the special order is accepted? What is the minimum price that could be charged for this special product?

Selling price of special order              $2.00

Less: Variable cost                             $1.70

Contribution margin – per unit                       $0.30

                                                                        ====

Number of treats                                             150

Increase in net income                                    $45 (145 x $0.30)

Since the order will be within relevant range, and the fixed costs will not change, the acceptance of this order will increase the net income by $45.

The minimum price that could be charged for this special product is the variable cost, $1.70 per treat.