Question

The income statement for Bonita Salmon Sales, which produces smoked salmon, follows: $ 762,400 Revenue (95,300 lbs) Expenses Fish Smoking materials Packaging materials Labour (wages) Administration Sales commissions Total expenses Pretax income $190,600 19,060 19,060 324,020 133,420 9,530 695,690 $ 66,710 Assume that the administrative costs are fixed and that all the other costs are variable. Your answer is partially correct. Try again. Suppose the provincial government curtails fishing because of low fish counts. As a result, Bonita Salmon Sales can buy only 47,650 lbs of salmon this year. Assume that the selling price, the fixed costs, and the variable costs remain the same as last year. Using only quantitative information, should Bonita Salmon operate this year? Explain your answer, using calculations. (Hint: Before you begin, identify the type of non-routine operating decision, the decision options, and the relevant information for this decision.) (Round answer to 2 decimal places, e.g. 5.35.) Contribution margin: 2.3 per Ib salmon

Answer 1

Answer 1.

Contribution margin

$2.10 per lb salmon

Explanation:

Fixed costs (admin. cost in given case) are not considered to calculate contribution margin

Selling price per unit ($762,400 / 95,300 lbs)		$8.00
Variable cost
Fish ($190,600 / 95,300 lbs)	$2.00
Smoking materials ($19,060 / 95,300 lbs)	$0.20
Packaging materials ($19,060 / 95,300 lbs)	$0.20
Labor ($324,020 / 95,300 lbs)	$3.40
sales commission ($9,530 / 95,300 lbs)	$0.10
Variable cost per unit		$5.90
Contribution margin		$2.10

The question is regarding whether to keep or drop decision ie should Bonita salmon operate this year or not.

Total fixed cost given = $133,420.

The total contribution margin that Bonita salmon can earn by selling 47,650 lbs = $2.10 * 47,650 lbs = $100,065

Decision: if the given fixed cost is avoidable in nature then Bonita salmon should not operate/produce this year. However if the fixed cost is unvoidable in nature then Bonita salmon should operate/produce this year in order to earn the contribution margin for minimizing the overall loss from $133,420 to $33,355 ($133,420 - $100,065).

Answer 2.

Willing to pay

$4.10

per lb salmon

Explanation:

If the demand, selling price & cost elements in the future are not affected, as per the general rule, the managers are willing to pay the current variable cost per unit cost + contribution margin per unit.

Willing to pay = Cost of fish per lb salmon + Contribution margin per lb salmon

= $2.00 + $2.10 = $4.10