Carol’s Cupcakes sells cupcakes and other desserts through its retail store. The company has always made all of its ingredients from scratch, but has recently been approached by a supplier that specializes in icing. Carol believes that the supplier’s icing is of equal quality to her own, and believes their offer of $3.00 per liter may enable her to save money. Carol is evaluating her own cost of producing icing: Per Liter 5,000 liters per year Direct materials $1.00 $5,000 Direct labour 0.50 2,500 Variable manufacturing overhead 0.25 1,250 Fixed manufacturing overhead – traceable* 1.00 5,000 Fixed manufacturing overhead - allocated 1.75 8,750 Total $4.50 $22,500 *40% relates to cleaning and maintenance of the icing equipment and 60% relates to depreciation of icing equipment (with no resale value) Examining the report, Carol says, “Their icing is just as good, and it would save me $1.50 per liter, that’s over $7,500 for the year. I think I’m going to take the deal.” needed; Assuming there is no other use for the icing equipment or the space it uses in the kitchen, what is the net dollar advantage or disadvantage of accepting the supplier’s offer? If the offer is accepted, Carol’s Cupcakes could use the space that had been previously used for making icing as a bacon-frying space. Carol believes that a new bacon line of cupcakes would produce margins of $5,000 per year. Should Carol’s Cupcakes accept the supplier’s offer?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Carol’s Cupcakes sells cupcakes and other desserts through its retail store. The company has always made all of its ingredients from scratch, but has recently been approached by a supplier that specializes in icing. Carol believes that the supplier’s icing is of equal quality to her own, and believes their offer of $3.00 per liter may enable her to save money. Carol is evaluating her own cost of producing icing:

	Per Liter	5,000 liters per year
Direct materials	$1.00	$5,000
Direct labour	0.50	2,500
Variable manufacturing overhead	0.25	1,250
Fixed manufacturing overhead – traceable*	1.00	5,000
Fixed manufacturing overhead - allocated	1.75	8,750
Total	$4.50	$22,500
*40% relates to cleaning and maintenance of the icing equipment and 60% relates to depreciation of icing equipment (with no resale value)

Examining the report, Carol says, “Their icing is just as good, and it would save me $1.50 per liter, that’s over $7,500 for the year. I think I’m going to take the deal.”

needed;

Assuming there is no other use for the icing equipment or the space it uses in the kitchen, what is the net dollar advantage or disadvantage of accepting the supplier’s offer?

If the offer is accepted, Carol’s Cupcakes could use the space that had been previously used for making icing as a bacon-frying space. Carol believes that a new bacon line of cupcakes would produce margins of $5,000 per year. Should Carol’s Cupcakes accept the supplier’s offer?

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