Question 1

Part 1

It has been three years since Jan Dodge purchased land and a building and began her company,

Neu Fruit Bars Ltd., in Neustadt, Ontario. The company produces only one product: a chocolate

bar made with locally grown fruits such as raspberries, strawberries, currents, elderberries, and

other seasonal harvests. The production plant is capable of producing 10,000 chocolate bars a

month, if run at full capacity.

Jan has been able to convince almost all of the small retailers in Grey County to sell the

chocolate bars in their variety stores, resulting in sales of7,000 bars a month. She has also been

making an effort to expand into nearby Huron County. Earlier this month (August) Jan was very

excited to receive an order from a retailer who wanted to place a one-time order for 3,000 bars in

September for a two-week festival during that month. The retailer hoped to feature the chocolate

bar at a booth they were planning to operate at the festival. This is a huge order for Neu Fruit

Bars Ltd. However, Jan was not convinced that it would benefit the business, given that the price

offered by the customer was considerably lower than the normal selling price.

To help Jan with her decision making, she asked her financial accountant, Jason, for advice. She

told Jason that she had received the special order for bars at a price of $0.80 per bar, compared to

the usual $1.15 per bar for all other customers. Jason looked at the financial data he had used to

prepare the most recent financial statements that were provided to their banker. These financial

statements adhere to GAAP, as requested by the bank. The cost to produce a chocolate bar, Jason

calculated, is $0.96 per bar (see below).

Detailed product cost data Jason used to value finished goods inventory on the balance sheet

follow:

Unit product cost components:

Cocoa	0.32
Milk	0.08
Sugar	0.06
Berries	0.15
Mixer-equipment operator	0.07
Production supervisor salary	0.12
Property taxes Production building	0.03
Depreciation- production equipment	0.08
Insurance (production assets)	0.05
Total	$0.96

Required:

Based on the product cost data provided by Jason, what advice would you give to Jan regarding

the special order? (5 marks)

Part 2

Jan was very concerned about making the correct decision about this special order and decided to

also ask Jill, her cost accountant, for an opinion on whether this order should be accepted at a

price of $0.80 per bar. Jill was excited to be consulted for input on this important decision and

wanted to demonstrate the power of management accounting concepts to Jan. Jill looked at the

cost data and prepared the following report.

Variable costs:

Cocoa $0.32

Milk 0.08

Sugar 0.06

Berries 0.15

Mixer equipment operator 0.07

Total variable costs $0.68

Annual fixed costs:

Production salary $14,400

Property taxes production

building 3,600

Depreciation production

equipment 9,600

Insurance (production assets) 6,000

Total ------------------------------ $33,600

Jill presented the above information to Jan, explaining that the cost behaviour of the various cost

inputs must be considered. That is, variable costs increase with each bar sold. Therefore, for each

of the 3,000 bars produced as part of the special order the company must buy cocoa, milk, sugar,

and berries. On the other hand, Jill insisted that the special order would not cause fixed costs to

change. Specifically, the salaries of the production staff (the bars can be produced with the hours

of a normal production shift), property taxes, depreciation, and insurance would be unchanged

regardless of whether the order is accepted.

Jan thanked Jill for the information and explanations, but felt even more confused about whether

this order was a good deal for the company.

Required:

a) Do you agree with the explanations provided by Jill? What advice would you provide Jan

about the special order? Show calculations to support your advice. (7 marks)

b) Are there other nonfinancial considerations that Jan should weigh in her decision? (3

marks)