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Frontleg Chocolate Company manufactures and sells a premium chocolate called PremiumChoco. The following data are available for preparing budgets for PremiumChoco for June through August
Frontleg Chocolate Company manufactures and sells a premium chocolate called PremiumChoco. The following | |||||
data are available for preparing budgets for PremiumChoco for June through August of 2020. | |||||
1. Sales: June , 30,000 pounds; July, 56,000 pounds, August 58,000 pounds. | |||||
2. Direct materials: each pound of PremiumChoco requires 5 pounds of cacao seeds at a cost of $2.95 per | |||||
pound and 4 pounds of cane sugar at $.50 per pound. | |||||
3. Desired inventory levels: | |||||
Type of Inventory | May 1 | June 1 | July 1 | August 1 | |
PremiumChoco (pounds) | 7,000 | 8,000 | 15,000 | 18,000 | |
cacao seeds (pounds) | 6,000 | 9,000 | 10,000 | 13,000 | |
cane sugar (pounds) | 5,000 | 14,000 | 20,000 | 25,000 | |
4. Direct labor: direct labor time is 30 minutes per pound at an hourly rate of $20 per hour. | |||||
5. Selling and administrative expenses are expected to be .05 cents per unit sold plus $82,000 per month. | |||||
6. Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows expected | |||||
costs to be 150% of direct labor cost (all variable costs). | |||||
7. The company uses a 30% markup percentage on total cost | |||||
8. Interest Expense is $150,000. | |||||
9. Income taxes are expected to be 21% of income before income taxes. |
Frontleg is approached by Backwaters Company to order 25,000 units at a special price of $42. In addition to the variable manufacturing cost (computed in the budget), the special order results in additional shipping cost of 75cents per unit. Compute the increase or decrease in net income Frontleg realizes by accepting the special order. Assuming Frontleg has excess operating capacity due to the economic climate, should Frontleg accept the special order? Direct labor cost is provided in the table above.
Special Price | |||||
Reject Order | Accept Order | Net income Increase (Decrease) | |||
Revenue | |||||
Costs | |||||
Net Income | |||||
Comment |
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