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Chapter 25: 8SE (page 1409)

Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:

Cocoa powder \)14,500

Chocolate syrup 103,000

Boxed assorted chocolates 204,000

The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.

Short Answer

Expert verified

The president’sdecision of making boxed assorted chocolatesis wrong.

Step by step solution

01

Meaning of Financial Analysis

Financial analysis refers to a technique used by business entities to determine the benefits of choosing a particular item amongst the available alternatives. Such an analysis considers thecost and revenue associated with a particular set of data.

02

Preparation of financial analysis

Particulars

Chocolate syrup

Boxed assorted chocolate

Processed sales revenue

$103,000

$204,000

Less: Sales revenue of cocoa powder

($14,500)

($14,500)

Revenue generated

$88,500

$189,500

Less: Processing cost

($72,000)

($183,000)

Income

$16,500

$6,500

03

Comment on the president’s decision  

According to the financial analysis shown above, the decision made by the president to make boxed assorted chocolates is not correct.

If the president wants to maximize profits, then he shouldshift his focus to chocolate syrup instead of boxed assorted chocolates.

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Most popular questions from this chapter

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:

Variable costs:

Direct materials \)0.11

Direct labor 0.09

Variable overhead 0.08

Fixed overhead 0.30

Total cost \(0.58

Collector-Cardz has enough excess capacity to handle the special order.

Requirements

1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.

2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?

What questions should managers answer when setting regular prices?

Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials \(17,510

Direct labor 2,600

Variable overhead 2,060

Fixed overhead 7,000

Total manufacturing costs for 2,000 bindings \)29,170

Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Cold Sports’s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.

2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

What are the two keys in short-term decision making?

What makes information relevant to decision making?
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