Question

The entire poultry industry is working hard to keep up with demand, but egg production is falling behind. According to the USDA’s Economic Research Service, the price of eggs in the U.S. is expected to rise more than 35 percent in 2018. The cause of this egg price increases? An uptick in foreign demand for US eggs is partly to blame. When the avian influenza devastated Europe this past year, egg suppliers in the U.S. stepped in to help fill the demand in these countries. Another problem arose in late 2017 where some egg supplies were contaminated with a dangerous insecticide, affecting countries including Germany, France and Belgium. With millions of eggs being pulled from the shelves in Europe, US exports of eggs rose 663 percent between 2016 and 2017. Domestic demand has increased as well. In the United States, 2017 saw a 20-year record in egg consumption at 275.2 eggs per person per year. When you multiply that by 325 million Americans, that’s a lot of eggs.

Now, consider the commercial use of eggs in the production of grocery items such as bread, ice cream, pasta, cakes and waffles. Let’s focus on the Sara Lee® All Butter Pound Cake® found in the freezer section of your local grocery store. The first ingredient listed on the package is, you guessed it – eggs. The pound cake sells for around $3.97 at the grocery store. However, with the price of eggs on the rise, it is likely that $3.97 price may change.

Which of Sara Lee’s variances will be affected by the increase in egg prices? Why?

Will the increase in egg prices result in favorable or unfavorable variances for Sara Lee? Why?

What is Sara Lee® likely to do to its standards based on this increase in price and which standards will be impacted?

What, if anything, can Sara Lee® do to mitigate the impact of the rising cost of eggs on its manufacturing costs?

Answer 1

1. Which of Sara Lee’s variances will be affected by the increase in egg prices? Why?

• Materials Price Variance: A variance that reveals the difference between the standard price for materials purchased and the amount actually paid for those materials.

• Profit Variance or Total Sales Margin Variance: It is the difference between the standard margin to the quantity of sales budgeted and the margin between standard cost and the actual selling price of the effected sales, i.e., the difference between actual profit margin and budgeted profit/margin.

2. Will the increase in egg prices result in favorable or unfavorable variances for Sara Lee? Why?

• Increase in egg prices result in unfavorable variances for sara lee, because the current standard prices were law and sara lee have to pay higher prices for purchasing the eggs.

3. What is Sara Lee® likely to do to its standards based on this increase in price and which standards will be impacted?

• Based on increase in the price of eggs sara lee will likely to revise its standards. specifically sara lee will change its direct material price standard to new higher price for eliminating the unfavourable result of the material price variance.

4. What, if anything, can Sara Lee® do to mitigate the impact of the rising cost of eggs on its manufacturing costs?

• These are the external factor affecting the sara lee's business, it can not reduce the price of eggs and for maintaining the quality it also can not reduce the material usage in its product. hence one solution is remain with sara lee and that is to icrease the sale price with increase in the eggs price to mitigate the impact of the rising cost of eggs.
• Or it may produce eggs on its own if capital structure is sufficient for production of eggs, and it can be produced at below price than availbale from market.