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 he decided to spend their retirement up int he 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 extra space for baking. Ned wasn$$t too sure if theexpansion was going to be profitable, he had an idea of the costs involved with apple pie and caramel apple production, but he couldn$$t 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$)$ $$30\mathrm{.}00$ $$9\mathrm{.}50$

Expected sales units $($for September$)18,0008,5009,500$

Expected Manufacturing costs: Total Apple Pies Caramel Apples

Fixed OH $($per month$)$ $$24,875\mathrm{.}00$ $$19,500\mathrm{.}00$ $$5,375\mathrm{.}00$

Direct labor $($per unit$)$ $$4\mathrm{.}00$ $$2\mathrm{.}40$

Direct materials $($per unit$)$ $$3\mathrm{.}25$ $$1\mathrm{.}80$

Variable OH $($per unit$)$ $$2\mathrm{.}50$ $$1\mathrm{.}20$

Expected Marketing and admin costs:

Fixed costs $($per month$)$ $$7,625\mathrm{.}00$ $$6,000\mathrm{.}00$ $$1,625\mathrm{.}00$

Variable costs $($per unit$)$ $$1\mathrm{.}45$ $$0\mathrm{.}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 $$20\mathrm{.}00$ and $$7\mathrm{.}50,$

respectively. With, the number of staff and the size of the bakery, Nikki determined thatvthe maximum capacity for the bakery is $4,200$ labor hours a month. At the current projected sale amounts she expects that they$$ll need $3,550$ hours to meet their regular sales volume. After review of the salaries of all the staff, Nikki determined that the average hourly wage was $$16\mathrm{.}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 month$$s expectations. They estimated that they$$d have to start $10,000$ 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 $$2,575$ $$4,225$

September costs $$32,500$ $$40,000$

And the conversion cost for the in$-$process pies is $50\%$ completed and $100\%$ for direct materials. $($Use the paragraph above to calculate the units completed and transferred out for work$-$in$-$process pies$)$

September was a success for the bakery! They didn$$t complete the special order

but focused on normal sales and with some overtime baked a few more pies. Here were the results for the actual sales and costs at the end of the month. $($The actuals as presented below are only to be used for Problem $6.)$

Total Apple Pies Caramel Apples

Actual Sales price $($per unit$)$ $$32\mathrm{.}00$ $$10\mathrm{.}00$

Actual sales units $19,5009,00010,500$

Actual variable manufacturing OH $$133\mathrm{.}225$

Actual variable marketing and admin cost $$19,200$

Actual fixed manufacturing costs $$22,150$

Actual marketing and admin costs $$8,750$

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.