Apple Hilly Farms

Ned Hilly was an investment banker and worked in San Francisco at a large bank.

As retirement got closer his wife, Sally, and him decided to spend their retirement up in

the Sierra Nevada foothills by buying an apple farm in Apple Hill. All their kids were

grown and their youngest daughter, Nikki, was finishing an accounting degree at Sac

State, whom they were hoping would help them out with the books once she was done.

A few years go by and the farm life is bustling. They had a U-Pick your own

apples at the farm which cut down costs of running the farm, though they ended up with

more apples than they could sell that first year. The second year, Sally came up with the

idea of opening a bakery on the farm. She was an excellent baker; she makes the best

apple pie west of the Mississippi, at least her family thought so. The bakery was a

success that year, more so than expected. Sally made homemade apple pies and caramel

apples with her special caramel sauce. In the following year, they expanded bakery

operations to include more staff and an extra space for baking. Ned wasnt too sure if the

expansion was going to be profitable, he had an idea of the costs involved with apple pie

and caramel apple production, but he couldnt pinpoint the details. Since Apple Hill is a

seasonal business he wanted to know how well his business did in the peak season to

ensure that it made enough to cover the costs in the off-season. Luckily, Nikki just

graduated in May and she would be able to work with Ned to work out the details and

come up with some possible advice and solutions to his questions.

Nikki started by talking with her parents about some of the estimated sales and

costs that they thought would incur for the month of September. Here are some of those

estimates:

Total Apple Pies

Caramel

Apples

Sales price (per unit) $25.00 $8.50

Expected sales units (for September) 17,000 7,500 9,500

Expected Manufacturing costs: Total Apple Pies

Caramel

Apples

Fixed OH (per month) $21,900.00 $17,625.00 $4,275.00

Direct labor (per unit) $3.75 $2.10

Direct materials (per unit) $3.00 $2.00

Variable OH (per unit) $2.25 $0.90

Expected Marketing and admin costs:

Fixed costs (per month) $6,675.00 $5,250.00 $1,425.00

Variable costs (per unit) $1.45 $0.35

Additionally, Sally informed her that the farm received a special order to sell their

apple pies and caramel apples at the local county fair in September. Sally wanted to sell

3,500 pies and 4,500 caramel apples for a discounted price of $20.00 and $7.50,

respectively. With, the number of staff and the size of the bakery, Nikki determined that

the maximum capacity for the bakery is 3,800 labor hours a month. At the current

projected sale amounts she expects that theyll need 3,205 hours to meet their regular

sales volume. After review of the salaries of all the staff, Nikki determined that the

average hourly wage was $15.00.

Problems

1. For Apple Pies only, compute the variable manufacturing costs per unit, full unit cost

per unit, variable cost per unit, full absorption cost per unit, prime cost per unit,

conversion cost per unit, profit margin per unit, contribution margin per unit, and gross

margin per unit.

2. Calculate the total profit expected for September, compute the weighted average

contribution margin, and compute the breakeven in units.

3. Calculate the labor hours needed for the special order, calculate the incremental

profit/(loss) for the special order, calculate the capacity available for regular orders,

compute the contribution margin per hour for regular orders, compute the contribution

margin lost from regular sales orders, calculate the total contribution margin including

the special order.

Problem Analysis

1. What costs are excluded from the Gross Margin calculation? Why would we exclude

these costs?

2. What does the mix of the weighted-average contribution margin tell us about the

impact to profits of each product?

3. Should Apple Hilly Farms complete the Special Order? Explain your answer by using

pricing terms from the textbook.