Q21E - Horngren'S Financial And Managerial Accounting

Question

Setting sales prices The Sweet Treats Company manufactures candy that is sold to food distributors. The company produces at full capacity for six months each year to meet peak demand during the “candy season” from Halloween through Valentine’s Day. During the other six months of the year, the manufacturing facility operates at 75% of capacity. The Sweet Treats Company provides the following data for the year: 

Cases of candy produced and sold 1,800,000 cases Sales price $ 37.00 per case Variable manufacturing costs 20.00 per case Fixed manufacturing costs 6,400,000 per year Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 3,500,000 per year The Sweet Treats Company receives an offer to produce 13,000 cases of candy for a special event. This is a one-time opportunity during a period when the company has excess capacity. What is the minimum sales price The Sweet Treats Company should accept for the order? Explain why

 

Step-by-Step Solution

Answer

The minimum sales price per case should be $22.

Step 1: Minimum sales price when the company has excess capacity and has a one-time opportunity to accept the order

When the company has excess capacity and has a one-time opportunity to accept customer orders, the company should accept the order at variable cost

Step 2: Calculation of minimum sales price

Minimum sales price = Variable manufacturing cost per case + Variable selling and administrative cost 

=$20 + $2

=$22