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.

Ned was also concerned about how much it cost to keep apple pie inventory on hand at the end of the month, caramel apples should be sold within a couple days, so no inventory is left at the end of the month. Since there is a limited shelf life for the apple pies, Ned and Sally try and keep the ending inventories in line with next months expectations. They estimated that theyd have to start 8,000 apple pies in order to have 1,000 apple pies in-process at the end of the month and 500 finished pies. At the end of August there were 500 pies that were in-process and no finished pies.

The variable costs associated with these inventories were as follows: DM	Conversion
Beginning WIP inventory	$1,675	$3,500
September costs	$20,000	$38,500

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.

4.Was manufacturing overhead under or over applied? What does over or under applied overhead mean?

5.Why would Apple Hilly Farms use standard costing since actual costing gives the actual cost? Why would they not want to wait until the actual costs are known?

6.Explain the variances calculated for Apple Hilly Farms. Why was September a good or bad month for them?