Question

During a typical week, Apex Supermarket sells 1,200 pounds of a food item unprepared (raw) for $4.99 per pound. The variable cost of the unprepared (raw) product is $2.40 per pound. Apex is considering whether to cook the product and sell it in its deli department for $11.99 per pound. The variable cost to cook the 1,200 pounds of food in the deli is $5,856 total. Fixed costs are not affected. If Apex cooks the raw product it will lose 10% of the product per week in the preparation process.

a) Calculate the increase or decrease in Apex’s net income if it cooks the product and sells it in the deli for $11.99 per pound (round to nearest $1).

b) Calculate the cooked (prepared) food price per pound that would eliminate any advantage for selling the cooked product in the deli (round to $0.00).

Answer 1

a) Increase in income from cooking and seeling the food in deli is $ 1,105.

Workings-

a) Raw food available		1,200 pounds
b) Processing loss @10%		120 pounds
c) Finished product available	[a-b]	1080 pounds

Particulars	Workings	($)
a) Sale value as raw food	(1200pounds*4.99/pound)	5,988
b) Variable cost	(1200pounds *2.40/pound)	2,880
c) Net Income from selling raw food	[a-b]	3,108

a) Sale Value in deli department	(1080pounds*11.99/pound)	12,949.20
b) Variable cost of raw food	(1200pounds *2.40/pound)	2,880.00
c) Variable cost to cook		5,856.00
d) Net Income from further cooking	[a-b-c]	4,213.20

a) Net Income from further cooking		4,213.20
b) Net Income from selling raw food		3,108.00
c) Increase in income	[a-b]	1105.00 (rounded to nearest $1)

b) To eliminate any advantage the Cooked food price per pound is $10.00.

Workings-

Option 1- To eliminate any advantage the profit from selling the cooked food in deli should be equal to profit from selling of raw food i.e. $3,108.
Calculation of selling price per pound for cooked product:-
Particulars	Workings	($)
a) Variable cost of raw food	(1,200pounds *2.40/pound)	2,880.00
b) Variable cost to cook		5,856.00
c) Net Income from selling raw food		3,108.00
d) Sale Value of cooked food	[a+b+c]	11,844.00
e) Sale price per pound of cooked food	[d/1080 pounds]	10 (Rounded to $0.00)