Question
Grandma MeeMaw is retired and lives in sunny, tropical Florida where she doesn't get to see her grandkids as much as she would like. To
Grandma MeeMaw is retired and lives in sunny, tropical Florida where she doesn't get to see her grandkids as much as she would like. To fill her time, MeeMaw has started a small business focusing on coconuts.
Since MeeMaw isn't as young and spry as she used to be, she purchases whole coconuts in good condition from the neighborhood kids for an average of $5 per coconut. MeeMaw then produces canned coconut cream & milk, filtered coconut water, and souvenir coconut shells, although she views coconut Cream and Milk as her primary product. At the end of the recent season, MeeMaw evaluated her financial results:
Cream & Milk | Water | Shells | Total | |
Sales revenues | $33,000 | $8,800 | $2,200 | $44,000 |
Share of coconut cost | 19,800 | 5,280 | 1,320 | 26,400 |
Processing expenses | 6,600 | 990 | 660 | 8,250 |
Allocated overhead | 4,400 | 660 | 440 | 5,500 |
Income (loss) | $ 2,200 | $1,870 | ($ 220) | $ 3,850 |
The cost of coconuts is assigned to each product line using the relative sales value of cream & milk, water, and shells (i.e., the percentage of total sales generated by each product). Processing expenses are directly traced to each product line. Overhead costs represent MeeMaws basic living expenses. These are allocated to each product line on the basis of processing expenses.
MeeMaw has a philosophy of every product line paying for itself and is determined to cut her losses on shells.
b. Another souvenir artist in the neighboring community has offered to buy every shell as is for $0.60 per shell (note: as is refers to the situation where MeeMaw incurs no other processing costs where the shells are concerned). Assume that MeeMaw expects to process the same number of coconuts each season. Should she sell shells to the artist? Support your answer with computations.
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