Question

Help 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 $ 40 Sales price per case Variable cost per case: 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 throughout Montana. The organization has offered Heavenly Treat $29 per case for a special-order batch of 1000 cases. Each case would require a shrink-wrap covering because of moisture problems associated 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 a. 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-1. What is 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? b-2. What is the opportunity cost of not accepting the offer C-1. What is 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? < Prey 3 of 3

Answer 1

Answer: a.)

Normal Incremental Cost of producing and selling a case of hot chocolate = Direct materials + Direct labour + Variable Overhead

= $12 + $3 +$10

= $25

Incremental cost per case associated with the special order =Direct materials + Direct labor + Variable Overhead +Additional cost for the shrink wrap – Saving in selling cost

=$12 + $3 + $10 + $3 - $1

=$27

b-1.) Impact on operating profit if the special order is accepted and Heavenly Treats is currently producing and selling 10,000 cases per month

Impact on Operating Profit from special order

Sales Price of Special Order	$29
Variable Cost per Special Order	$27
Contribution margin per unit (a)	$2
Number of special order units (b)	1000
Increase in Operating Profit (a*b)	$2,000

b-2.) Operating cost for not accepting the order

Operating cost for not accepting the order

$2,000

c-1.) Decrease in Operating Profit = $8,000

Operating profit When 12000 normal csses are sold
Sales Revenue (12000*$40)	$480,000
Less: Variable Cost (12000*$25)	$300,000
Contribution margin	$180,000
Less: Fixed costs	$60,000
Operating Profit (A)	$120,000

Operating profit When 10000 normal crates and 1000 special order crates are sold
Sales Revenue (10,000*$40 + 1000*$29)	429,000
Less: Variable cost (10000*25 + 1000*27)	277,000
Contribution margin	152,000
Less: Fixed cost	60,000
New Operating Profit (B)	92,000
Decrease in Operating profit (A - B)	$28,000

c-2.) Opportunity Cost of accepting the offer = $28,000