Question

1021-1, LO21-2, LO21-3, Heavenly Treat manufactures cases of hot chocolate that are typically sold to restaurants. Its main factory has the capacity to produce and sell 12,000 cases per month. The following information is available for the factory. 021-4 EXERCISE 21.5 Soal Order Decisions and Ipportunity Costs $40 Sales price per case Variable cost per crate: Direct materials Direct labor Variable overhead & sales commissions Fixed costs per month 12 3 10 $60,000 Wildwood Camps is a youth organization that serves hot chocolate at its camping facilities through- out Montana. The organization has offered Heavenly Treat $29 per case for a special-order batch of 1,000 cases. Each case would require a shrink-wrap covering because of moisture problems asso ciated with the organization's storage warehouses. The cost to shrink-wrap the order is estimated at $3 per case. Selling costs associated with the order would be decreased by $1 per case because it would not include any sales commissions. What is the normal incremental cost of producing and selling a case of hot chocolate? What is the incremental cost per case associated with this special-order? b. Show the impact on monthly operating profit if the special order is accepted and Heavenly Treats is currently producing and selling 10,000 cases per month. What is the opportunity cost of not accepting the offer? Show the impact on monthly operating profit if the special order is accepted and Heavenly Treats is currently operating at its full capacity of 12,000 cases per month. What is the oppor- tunity cost of not accepting the offer? c.

Answer 1

a.

Direct Material	$                12
Direct Labor	$                  3
Variable Overhead & Sales Commission	$                10
Normal Incremental Cost	$                25

Direct Material	$                12
Direct Labor	$                  3
Variable Overhead & Sales Commission	$                  9
Special Packaging	$                  3
Incremental Cost for Special Order	$                27

b.

Incremental Revenue	$        29,000
Incremental Costs
Direct Material	$        12,000
Direct Labor	$          3,000
Variable Overhead & Sales Commission	$          9,000
Special Packaging	$          3,000
Total Incremental Costs	$        27,000
Increase / (Decrease) in Net Operating Income	$          2,000

Increase in Net Operating Income if special order is accepted = $2000,
Opportunity Cost of not accepting the order = $2000

c.

Incremental Revenue	$        29,000
Incremental Costs
Direct Material	$        12,000
Direct Labor	$          3,000
Variable Overhead & Sales Commission	$          9,000
Special Packaging	$          3,000
Total Incremental Costs	$        27,000
Income from Special Order	$          2,000
Loss of Contribution Margin from Regular sales	$      (15,000)
Increase / (Decrease) in Net Operating Income	$      (13,000)

Decrease in Net Operating Income if special order is accepted = ($13000),
Opportunity Cost of not accepting the order = ($13000) or $0

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