Alternative concepts of cost: Faye Yoshida (adapted from CM A exam). Faye Yoshida operates a small coffee shop. She produces regular coffee available from many other similar businesses and she also produces gourmet coffee for special orders.

Her accountant prepared the following annual income statement:

The depreciation charges are for machines used in the respective products. The rent is for the building space, which Ms. Yoshida has leased for 10 years at $10,000 per year. The accountant apportions the rent and the heat and light to the product lines based on amount of floor space occupied. Material, labor, power, and other costs arc variable costs that are directly related to the product causing them.
A valued customer has asked Ms. Yoshida to supply 2,000 cups of gourmet coffee. Ms. Yoshida is working at capacity and would have to give up some other business in order to take this business. She must produce special orders already agreed to. but she could reduce the output of her regular orders by about one-half for one year and use the freed machine time normally used for the regular orders to produce the special orders. The customer is willing to pay $3.50 per cup. The coffee beans will cost about $1 .50 per cup and the labor w ill be $ 1 .00 per cup. Ms.
Yoshida will have to spend $1,000 for a special coffee machine that she will discard when the job is done. The special order will also require additional power costing $250.

a. Calculate and present the differential cash cost of tilling the special order, considering both the cost of the order and the costs saved by reducing work on standard products.

b. Should Ms. Yoshida accept the order? Explain your answer.

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Gourmet Regular Sales $40,000 $20,000 Coffee Beans $6.000 $ 3,000 Total $60,000 $ 9,000 Labor 10.000 4,000 14,000 Depreciation 3,000 1,500 4,500 Power 400 300 700 Rent 6.000 4,000 10,000 Heat and Light 500 150 650 Other 500 400 900 Total Costs $26.400 $13,350 $39,750 Operating Profit $13,600 $ 6,650 $20,250