Short-run pricing, budgeting, capacity constraints. Tillsonburg Dairy, maker of specialty cheeses, produces a soft cheese from the milk of Holstein cows raised on a special corn-based diet. One kilogram of soft cheese, which has a contribution margin of $8, requires 4 litres of milk. A well-known gourmet restaurant has asked Tillsonburg to produce 2,000 kilograms of a hard cheese from the same milk of Holstein cows. Knowing that the dairy has sufficient unused capacity, the owner of the dairy calculates the cost of making one kilogram of the desired hard cheese as follows:

REQUIRED 1. Suppose Tillsonburg can acquire all the Holstein milk that it needs. What is the minimum price per kilogram it should charge for the hard cheese?
2. Now suppose that Holstein milk is in short supply. Every kilogram of hard cheese produced by Tillsonburg will reduce the quantity of soft cheese that it can make and sell. What is the minimum price per kilogram it should charge to produce the hard cheese?LO1

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Milk (10 litres x $1.50 per litre) Direct manufacturing labour Variable manufacturing overhead costs Fixed manufacturing overhead costs allocated Total manufacturing costs $ 15.00 5.00 3.00 6.00 $29.00