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Chapter 25: Q25-21RQ (page 1407)
What is the most common constraint faced by merchandisers?
Answer
The merchandisers majorly face a lack of space, resources, and budget constraints.
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What is differential analysis?
Each morning, Max Smith stocks the drink case at Max’s Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.
Max’s Beach Hut sells three types of cold drinks:
1. Licious-Ade in 12-oz. cans for \(1.40 per can
2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle
3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle
Max’s Beach Hut pays its suppliers:
1. \)0.20 per 12-oz. can of Licious-Ade
2. \(0.35 per 20-oz. bottle of Licious-Ade
3. \)0.55 per 20-oz. bottle of Pep-Cola
Max’s Beach Hut’s monthly fixed costs include:
Hut rental \(355
Refrigerator rental 65
Max’s salary 1,700
Total fixed costs \)2,120
Max’s Beach Hut can sell all the drinks stocked in the display case each morning.
Requirements
1. What is Max’s Beach Hut’s constraining factor? What should Max stock to maximize profits?
2. Suppose Max’s Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max’s stock? How many units of each product will be available for sale each day?
Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.
Thomas Company makes a product that regularly sells for \(12.50 per unit. The product has variable manufacturing costs of \)8.50 per unit and fixed manufacturing costs of \(2.00 per unit (based on \)200,000 total fixed costs at current production of 100,000 units). Therefore, the total production cost is \(10.50 per unit. Thomas Company receives an offer from Wesley Company to purchase 5,000 units for \)9.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Thomas does not expect any additional fixed costs.
1. If Thomas Company has excess capacity, should it accept the offer from Wesley? Show your calculations.
2. Does your answer change if Thomas Company is operating at capacity? Why or why not?
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.
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