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		3.50
Fixed costs per month	$	122,000.00

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

Solution a:
Incremental unit cost of creating a normal crate
Direct materials	5.50
Direct labor	10.50
variable overhead	3.50
Incremental unit cost of creating a normal crate	19.50
Incremental unit cost of creating a special-order crate
Direct materials	5.50
Direct labor	10.50
variable overhead (3.50- 0.50)	3.00
Additional Cost of Label	1.00
Incremental unit cost of creating a special-order crate	20.00
Solution b-1:
Impact on Operating Profit from special order
Sales Price of special order	22.00
variable Cost for Special order	20.00
Contribution margin per unit	2.00
*Number of special order units	5000
Increase in Operating Profit	10000
Solution b-2:
Opportunity Cost of not accepting the offer	10000
Solution c-1:
Operating profit When 35000 normal crates are sold
Sales Revenue (35000*$26)	910000
Less: Variable cost (35000*19.50)	682500
Contribution margin	227500
Less: Fixed costs	122000
Operating profit	105500
Operating profit When 30000 normal crates and 5000 special order crates are sold
Sales Revenue (30000*$26 + 5000*$22)	890000
Less: Variable cost (30000*19.50 + 5000*20.00)	685000
Contribution margin	205000
Less: Fixed costs	122000
New Operating profit	83000
Decrease in Operating profit	-22500
Solution c-2:
Opportunity Cost of accepting the offer	22500