Question

Poppycrock, Inc., manufactures large crates of microwaveable popcorn that are typically sold to distributors. Its main factory has the capacity to manufacture and sell 35,000 crates per month. The following information is available for the factory. Sales price per crate $ 25.00 Variable cost per crate: Direct materials 5.50 Direct labor 10.50 Variable overhead 3.60 Fixed costs per month $ 108,000.00 Boys and Girls of Canada is a not-for-profit organization that raises funds each year by selling popcorn door-to-door. It offers to pay Poppycrock $22 per crate for a special-order batch of 5,000 crates. The special-order popcorn would include a unique label with information about the Boys and Girls of Canada. The additional cost of the label is estimated at $1.00 per crate. In addition, the variable overhead for these special-order crates would decrease by $0.50 because there would be no distribution costs. a. What is the incremental cost of creating a normal crate of popcorn? A special-order crate of popcorn? (Round your answers to 2 decimal places.) b-1. What is the impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and distributing 30,000 normal crates per month? b-2. What is the opportunity cost of not accepting the offer? c-1. What is the impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and selling 35,000 normal crates per month? c-2. What is the opportunity cost of accepting the offer?

Answer 1

a. Incremental cost

Normal crates: incremental costs are all variable costs including direct labor, direct materials and variable overhead. = $5.50 + $10.50 + $3.70 = $19.70.

Special order crates:incremental costs include all variable costs for the normal crate plus an additional cost for the special lable less $0.50 in distribution cost = $19.70 + $1.00 - $0.50 = $20.20

b.

monthly operating profit when distributing 30,000 normal crat e can be calculated by multiplying the contribution margin by the number of crates sold and deducting fixed expenses as follows: CM = $25 ? $19.70 = $5.30. Monthly operating profit = $5.30 × 30,000 = $159,000 ? $102,000 = $57,000.

If Poppycrock accepts the special order, it will add the contribution margin for the 5,000 crates for the Boys and Girls of Canada order to its monthly profit: ($22 ? $20.20) × 5,000 = $9,000. Monthly operating profit with the special order is $57,000 + $9,000 = $66,000. Opportunity cost of not accept order is $9,000

C.

Poppycrock is operating at full capacity. It has a production constraint that will require it to forego some normal sales in order to accept the special order. Without the special order, monthly profits at full capacity would be:($25 ? $19.70) × 35,000 crates ? $102,000 = $83,500

With the special order, monthly profits would be

:($25 ? $19.70) × 30,000 crates + ($22 ? $20.20) × 5,000 ? $102,000 = $66,000.

The difference between these monthly operating profit numbers ($83,500 ? $66,000 = $17,500) is the opportunity cost of accepting the special order when Poppycrock is operating at full capacity. It is also equal to the difference in the normal and special order contribution margins ($5.30 ? $1.80 = $3.50) for the 5,000 crates being considered:

$3.50 × 5,000 crates = $17,500.