Question 1) Joint Costs and Additional Processing
Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of oranges, costing $400, is transformed using labor of $40 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of 100 pounds of peels at the split-off point is $300and the value of a pint of juice (not pasteurized or bottled) is $0.30. Beyond the split-off point, the cost of sugar-coating and packaging and the 100 pounds of peels is $50. The cost of pasteurizing and packaging the 300 pints of juice is $150. A 100 pound box of candied peels is sold to commercial baking companies for $500. Each pint of juice is sold for $1.
Questions
A. Allocate joint costs using the relative sales values at the split-off point and calculate the profit per 100 pound box of sugar coated peels and the profit per pint of juice.
B. What is the incremental benefit (cost) to the company of sugar coating the peels rather than selling them in their condition at the split-off point?
C. What is the incremental benefit (cost) to the company of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?
Question 2) Determining the profit Maximizing price
Elite Kitchenware has come out with a new line of dishes that it plans to test market through a series of demonstrations at the local mall throughout the month of August. If the demonstrations result in enough sales, then the program will be expanded to other malls in the region. The cost of the demonstrations is a flat fee of $1,000 to the mall owner/operator and a commission of 25% of revenue to the person giving the demonstrations (the demonstrator will not receive any salary beyond this commission).
Elite Kitchenware's fixed costs of producing the dishes are $5000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered (there will be no beginning or ending inventory). Variable production costs are $15 per set of dishes. In addition it will cost approximately $10 per set to ship the dishes to customers.
Beverly Slater, a product manger at Elite Kitchenware, is charged with recommending a price for the items. Based on her experience with similar items, focus group responses, and survey information, she has estimated the number of units that can be sold at various prices.
Price Quantity
$69.99 300
59.99 500
49.99 650
39.99 800
29.99 1,000
Questions
a. Calculate expected profit for each price.
b. Which price maximizes company profit?
Question 3) Symphony Sound, is designing a portable recording studio to be sold to consumers. The team developing the product includes representatives from marketing, engineering, and cost accounting. The recording studio set will include sound-canceling monitor headphones, audio recording and enhancement software, several instrumental and vocal microphones, and portable folding acoustic panels. With this set of features, the team believes that a price of $4,000 will be attractive in the market place. Symphony Sound seeks to earn a per unit profit of 20 percent of selling price.
Questions
a. Calculate the target cost per unit.
b. The team has estimated that the fixed production costs associated with the product will be $1,860,000 and variable costs to produce and sell the item will be $2,500 per unit. In light of this how many units must be produced and sold to meet the target cost per unit?
c. Suppose the company decides that only 2,000 units can be sold at a price of $4,000 and, therefore, the target cost cannot be reached. The company is considering dropping the folding acoustic panels, which add $750 of variable costs per unit. With this feature dropped, the company believes it can sell 2,700 units at $3,200 per unit. Will Symphony Sound be able to produce the item at the new target cost or less?