Question

STUART DAW Co. Stuart Daw Co. is a typical medium-sized coffee roaster. The C.E.O. and the administrative management have prepared the budget for the year 2019 Chart 1 shows the most relevant assumptions of the budget: the demand is supposed to remain approximately the same as in 2018 (market growth rate- 0). Nowadays, Stuart Daw Co. has a market share of 20% (volume) and the goal is to increase it up to 25% in the next year CHART 1: Assumptions for the budget Sales volume (quantity in pounds) Green Coffee Costs (per pound) Plant Costs (labor and other overhead) Total Cost of Coffee & Production Other operating expense: selling and administrative (on 1,000,000 $ 6 1,000,000 $ 7,000,000 $2,000,000 historical basis) The relations with customers and the administration of orders are the major causes of selling and administrative expenses. The market is segmented in three categories of customers: restaurants and hotels, offices, retailers. Avarage size of Percentage on sales Restaurants and hotels Offices Retailers orders (pounds) 100 10 50 volume (budget) 40% 20% 40% The capacity levels are the following: 1. for manufacturing department: 1,250,000 pounds per year; 2. for selling and administrative department: 35,000 orders Required: What should be the price of a pound of coffee assuming that the goal for 2019 is a 10% Ros-in each segment of the market? Draw up the pro-forma income statement. Use alternatively the "push" and the "pull" approaches to costing. What would happen if Stuart Daw Co.'s main competitors decided to sell the coffee at $ 12 per pound? Would Stuart Daw still be competitive?

Answer 1

Step 1

Cost of production of Coffee for sale

Expected sales volume during the year 2019 would be as under

Sales volume during 2019 1,000,000 pounds

Total cost of green coffee and production $ 7,000,000

Other expenses including selling & Distribution    $ 2,000,000

Total cost of Production    $ 9,000,000

Expected return on Sale (10% ROS)    $ 1,000,000

Total sale value $ 10,000,000

Sale price per pound of Coffee $ 10

There will be no effect, if the competitor decide to sell the coffee at the rate of $ 12 per pound.