91Ó°ÊÓ

Burst, Inc., cans peaches for sale to food distributors. All costs are classified as either manufacturing or marketing. Burst prepares monthly budgets. The March 2012 budgeted absorption-costing income statement is as follows: Monthly costs are classified as fixed or variable (with respect to the number of crates produced for manufacturing costs and with respect to the number of crates sold for marketing costs): Burst has the capacity to can 2,000 crates per month. The relevant range in which monthly fixed manufacturing costs will be "fixed" is from 500 to 2,000 crates per month. 1\. Calculate the markup percentage based on total variable costs 2\. Assume that a new customer approaches Burst to buy 200 crates at \(\$ 55\) per crate for cash. The customer does not require any marketing effort. Additional manufacturing costs of \(\$ 3,000\) for special packaging) will be required. Burst believes that this is a one-time-only special order because the customer is discontinuing business in six weeks' time. Burst is reluctant to accept this 200-crate special order because the \(\$ 55\) -per-crate price is below the \(\$ 65\) -per-crate full manufacturing cost. Do you agree with this reasoning? Explain. 3\. Assume that the new customer decides to remain in business. How would this longevity affect your willingness to accept the \(\$ 55\) -per-crate offer? Explain.

Step by step solution

01

Identify Total Variable Costs

First, we need to determine what portion of the costs are variable. Variable costs mean they change with the number of crates produced or sold. According to the information, separate out the manufacturing and marketing variable cost components.

02

Calculate Markup Percentage

To find the markup percentage based on total variable costs, calculate: \( \text{Markup Percentage} = \frac{\text{Selling Price} - \text{Total Variable Cost per crate}}{\text{Total Variable Cost per crate}} \times 100 \). Determine the selling price per crate and the total variable cost per crate to compute this value.

03

Assess Special Order Impact on Contribution Margin

Evaluate if accepting the special order would positively affect the contribution margin. Calculate the additional contribution margin with the formula: \( \text{Contribution Margin} = (\text{Price per crate} - \text{Variable cost per crate}) \times \text{No. of crates} - \text{Additional fixed costs} \). Consider if the special order improves the total contribution margin.

04

Evaluate One-Time Order Acceptance

Determine if accepting a one-time special order at \(\$55\) makes financial sense. Calculate whether the contribution margin from this order is positive by comparing the offer price with the variable cost and additional fixed costs for special packaging.

05

Consider Future Business Implications

If the customer might remain a business partner, assess the potential long-term impacts of building a business relationship. Focus on the strategic benefits of market positioning, potential sales growth, and future revenue streams beyond the immediate marginal contribution analysis.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Absorption Costing

Understanding absorption costing is key in managerial accounting. It involves assigning all manufacturing costs to the product, whether they are variable or fixed. This means that each crate of peaches from Burst, Inc. will carry a portion of both direct and indirect costs associated with its production.

• Direct Costs: Specifically tied to production, like labor and materials.
• Indirect Costs (Fixed): Expenses that do not change with the level of production, such as salaries and rent.

Absorption costing provides a complete picture of production costs, which is crucial for evaluating profitability and setting prices appropriately. By including all costs, it helps prevent underpricing a product which could lead to financial issues over time.

Variable Costs

Variable costs differ from fixed costs in that they fluctuate with production volume. In the case of Burst, Inc., these costs could include materials or labor that increase with the number of crates produced.

The key characteristics of variable costs are:

• Proportional: Rise and fall directly with production levels.
• Influence Pricing: Essential for determining the minimum price at which a product can be sold without incurring a loss.

Understanding which costs are variable helps Burst, Inc. make educated decisions about pricing and production levels. If variable costs are underestimated, it could lead to accepting orders that harm profitability.

Markup Calculation

Calculating markup is a way to determine how much more a company charges for a product compared to its cost. It's an essential tool for Burst, Inc. in setting prices.

To calculate the markup percentage based on total variable costs, use the formula:
\[ \text{Markup Percentage} = \frac{\text{Selling Price} - \text{Total Variable Cost per crate}}{\text{Total Variable Cost per crate}} \times 100 \]

This calculation ensures that the selling price covers all variable costs and contributes to covering fixed costs as well. Overlooking the correct markup can lead to charging a price that does not sustain the business financially.

Contribution Margin Analysis

Contribution margin analysis helps Burst, Inc. determine how much money from sales will contribute to covering fixed costs and generating profit. It's calculated by subtracting variable costs from sales revenue.

The formula for contribution margin is:
\[ \text{Contribution Margin} = \text{Selling Price per crate} - \text{Variable Cost per crate} \]

This analysis supports decision-making. For special orders, like the one Burst, Inc. is considering, contribution margin helps gauge whether the order adds to profit or merely covers costs. If a special order increases the contribution margin, it may be worth accepting, even if it doesn't meet full costing standards, especially considering long-term business relationships and strategic positioning.