Hegy Chocolate is located in Cleveland. The company prepares gift boxes of chocolates for private parties and corporate promotions. Each order contains a selection of chocolates determined by the customer, and the box is designed to the customer's specifications. Accordingly, Hegy Chocolate uses a job cost system and allocates manufacturing overhead based on direct labor cost.
One of Hegy Chocolate's largest customers is the Bailey and Choi law firm. This organization sends chocolates to its clients each Christmas and also provides them to employees at the firm's gatherings. The law firm's managing partner, Peter Bailey, placed the client gift order in September for 500 boxes of cream-filled dark chocolates. But Bailey and Choi did not place its December staff-party order until the last week of November.
This order was for an additional 100 boxes of chocolates identical to the ones to be distributed to clients.
Hegy Chocolate budgeted the cost per box for the original 500-box order as follows:
Chocolate, filling, wrappers, box ................................................................ $14.00
Employee time to fill and wrap the box (10 min.) .......................................... 2.00
Manufacturing overhead.................................................................................. 1.00
Total manufacturing cost............................................................................. $17.00
Ben Hegy, president of Hegy Chocolate, priced the order at $20 per box.
In the past few months, Hegy Chocolate has experienced price increases for both dark chocolate and direct labor. All other costs have remained the same. Hegy budgeted the cost per box for the second order as follows:
Chocolate, filling, wrappers, box................................................................. $15.00
Employee time to fill and wrap the box (10 min.)........................................... 2.20
Manufacturing overhead.................................................................................. 1.10
Total manufacturing cost............................................................................. $18.30
Requirements
1. Do you agree with the cost analysis for the second order? Explain your answer.
2. Should the two orders be accounted for as one or two jobs in Hegy Chocolate's system?
3. What sales price per box should Hegy set for the second order? What are the advantages and disadvantages of this price?