Question

Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavour. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle. Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade: (a) Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (b) If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (c) Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.

Answer 1

a)

	sell as lemonade	sell as raspberry lemonade	lncremental effect on profit/loss
selling price	4	5.5`	1.5
incremental variable cost	0	-1.5	-1.5
saving in variable selling cost due to further processing	1	.80	.20
profit/(loss)per botle	3	3.2	.20

profit will increase by .20*34000=$ 6800 from further prossing to raspberry lemonade.further processing should be done

b)

Incremental revenue [5-4]	1
saving in selling cost [1-.80]	.20
incremental processing cost	1.5
profit /(loss) per bottle	-.30

There will be a loss of [-.30*34000] = -$10200 from further processing so further processing should not be done.

3)

	Relevant/Irrelevant	decision
Selling price of lemonrade	Relevant	as it will be used to calculate incremental revenue or it will be a loss of revenue if futher processing is done
selling price of raspberry lemonrade	relevant	incremental revenue
variable cost of lemonrade	irrelevant	it will be incurred whether further processin is done or not
variable selling cost	relevant	as same will decrease if further processing is done ,so decremental cost
variable further processing cost	Relevant	incremental cost