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. $ 27.80 Sales price per crate Variable cost per crate: Direct materials Direct labor Variable overhead Fixed costs per month 5.50 10.50 3.90 $113,000.00 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? a. Incremental unit cost of creating a normal crate Incremental unit cost of creating a special-order crate b-1. Impact on operating profit b-2. Opportunity cost 0-1. Impact on operating profit

Answer 1

Variable costs are incurred for every unit produced, while fixed costs remain constant under the relevant range (capacity)

a.Incremental cost of creating a normal crate of popcorn = variable cost per crate

= 5.50+10.50+3.90

= $19.9

A special order crate = 5.50+10.50+3.4+1

= $20.4

Note: Since fixed costs will not change, they are not included in incremental costs

b-1

Spare capacity exists, no loss of normal sales

Impact on profits = (22-20.4)*5,000 = $8,000

I.e. increase in profits by $8,000

b-2 Opportunity cost of not accepting the offer = profit from order

= $8,000

c-1 Impact on profits:

Profit from special order = $8,000

Loss on normal sales = (27-19.9)*5,000 = 35,500

Decrease in profits = $(27,500)

c-2. Opportunity cost of accepting the offer = $27,500