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 $ 26.00

Variable cost per crate: Direct materials 5.50

Direct labor 10.50 Variable overhead 3.80

Fixed costs per month $ 101,000.00

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 Crate	Special Order Crate
Direct Material	5.50	5.50
Direct Labour	10.50	10.50
Variable O/H	3.80	3.30*
Additional Cost of label	-	1
Incremental Cost	19.80	20.30

*The variable overhead for these special-order crates would decrease by $0.50 because there would be no distribution costs. Hence = 3.80 – 0.50 = 3.30

(b1) Impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and distributing 30,000 normal crates per month :-

Increase in Sales (5000 crates * $22)	110000
(-) Increase in Variable Cost (5000 crates * $20.30)	101500
Increase Operating Profit	8500

(b2) Opportunity cost of not accepting the offer:-

Opportunity cost is what a person sacrifices when they choose one option over another

If the special offer is not accepting, then person sacrifice the benefit that is gives by this special offer

Hence Opportunity cost of not accepting special offer = $8500

(c1) Impact on Poppycrock's monthly operating profit if it accepts the offer and it is producing and selling 35,000 normal crates per month :-

Increase in Sales (5000 crates * $22)	110000
(-) Increase in Variable Cost (5000 crates * $20.30)	101500
(-) Opportunity cost (as calculated below)	31000
Decrease in Operating Profit	22500

(c2) Opportunity cost of accepting the offer:-

Opportunity cost is what a person sacrifices when they choose one option over another

In this case Popycrocks producing & selling 35000 normal crates

The Factory capacity is also 35000 crates

Hence there is no spare capacity & if Popycrocks accept the special order then there is need to drop down the same of normal crate by 5000 units

If the special offer is accepting, then person sacrifice the benefit that is gives by the normal crate i.e

Sales (5000 * 26)	130000
(-) Variable Cost (5000 * 19.80)	99000
	31000