Question

Lucky Restaurant makes and sells a variety of soups. It also makes and sells whole-grain bread. It anticipates the following financial performance for its bread business during the month of May.

	Total	Per Loaf
Capacity (in loaves)	25,000
Production & Sales (in loaves)	22,000
Revenue	$220,000`	$10.00
Variable production costs	68,200	3.1
Variable selling & admin. costs	33,000	1.5
Fixed production overhead	38,000	1.4
Fixed selling & admin. costs	6,600	0.3
Operating Income	$81,400	$3.70

Lucky's management expects its selling price, variable cost per unit, and total fixed cost to remain the same for next year.

Required:

Question 1:

Lucky received a special order for 4,000 loaves of bread. The loaves are identical to the loaves it currently produces. However, because the order is a special order, it will not need to pay the $0.20 per loaf commission to its sales force.  Compute the minimum price per loaf that it should charge for the special order.

Question 2:

Management is considering whether to outsource the production of bread for the months of June and July so that its baker can take a two-month vacation. It believes that outsourcing will not affect bread sales and that bread sales will be the normal 22,000 loaves per month for June and July.

Management has gathered the following information about outsourcing:

• Whole Earth Breads will sell the bread to Lucky for $2.00 per loaf
• If bread production is outsourced, Lucky will be able to save a total of $8,800 in fixed costs($4,400 in June and $4,400 in July)

Compute the most Lucky should be willing to pay per loaf to purchase the break from Whole Earth Breads.

Answer 1

Question 1:

Lucky received a special order for 4,000 loaves of bread. The loaves are identical to the loaves it currently produces. However, because the order is a special order, it will not need to pay the $0.20 per loaf commission to its sales force.  Compute the minimum price per loaf that it should charge for the special order.

Ans : $ 5.75 Per Loaf

Note : Since the idle capacity is only 3000 units hence if Lucky receis the order he has to forgo 1000 units contribution which would have otherwise earnt.

Particulars	Amount	Basis of Calculation
Variable production cost	3.10
Variable selling and admin Cost	1.30	1.5-0.2
Total Variable Cost per Unit	4.40
Number of Unit	4,000.00
Total Cost	17,600.00	4000*4.4
Contribution lost on 1000 Unit	5,400.00	1000*5.4
Total Cost + Oppurtunity cost	23,000.00	17600+5400
Number of Unit	4,000.00
Price per Unit	5.75	23000/4000

Calcuation of contribution per unit

Contribution per unit	Amount
Selling Price	10.00
Variable production cost	3.10
Variable selling and admin Cost	1.50
Contribution per unit	5.40

Question 2:

Management is considering whether to outsource the production of bread for the months of June and July so that its baker can take a two-month vacation. It believes that outsourcing will not affect bread sales and that bread sales will be the normal 22,000 loaves per month for June and July.

Management has gathered the following information about outsourcing:

• Whole Earth Breads will sell the bread to Lucky for $2.00 per loaf
• If bread production is outsourced, Lucky will be able to save a total of $8,800 in fixed costs($4,400 in June and $4,400 in July)

Compute the most Lucky should be willing to pay per loaf to purchase the break from Whole Earth Breads.

Ans : Yes as it results into saving of $ 57,200 over two month

Variable production cost	3.10
Oursourcing cost	2.00
Saving per loaf	1.10
Number of loaf in two month	44,000.00
Total Saving of variable production cost	48,400.00
Saving in fixed cost	8,800.00
Total Saving	57,200.00