QUESTION 5 In downtown Clutchmore lies a famous French restaurant by the name of Parisian Restaurant Ltd. The establishment is owned and managed by Chef Albert. One of the signature products of the restaurant is its gourmet cakes, which is specially made in the restaurant's kitchen. The restaurant can make a maximum of 12,000 cakes per year. The company, however, is currently operating at 95% capacity. Each cake sells for $100. The variable costs based on the current 95% capacity are as follows: Direct materials Direct labour Variable overhead $ 456,000 $ 57,000 $ 171,000 $ 684,000 The fixed costs per year consist of the following: Fixed overhead Administration $ 130,000 $ 510,000 $ 640,000 Consider the following independent scenarios: Scenario A Grand Emporium Ltd has approached Parisian Restaurant Ltd to purchase 2,000 cakes for its promotional activities. As this is an unusually large order, Grand Emporium Ltd is only willing to pay a discounted total price of $180,000. They have also requested for the cakes to be packaged in specially made gift boxes which include the logos of both companies. This will incur an additional $3 variable cost per cake. The cheapest packing machine that can package the cakes to meet the requirement of Grand Emporium Ltd costs $12,000. Apart from the special order, there is no further use of this machine Scenario B Assembly Square Bakery has approached Parisian Restaurant Ltd to produce all cakes currently produced for the entire year for $102 per cake. As the buy option includes all necessary marketing and administration, Parisian Restaurant Ltd can reduce $500,000 of its fixed costs. Required: a) For Scenario A: (i) Calculate the incremental benefit (or cost) of the special order. (3% marks) (ii) Should Parisian Restaurant Ltd accept the special order? Discuss quantitative and qualitative factors. (Maximum 80 words) (3% marks) b) For Scenario B: (i) Prepare a table to compare the costs of the make and buy options. (2% marks) (ii) Should Parisian Restaurant Ltd continue making the cakes or buy them from Assembly Square Bakery? Discuss quantitative and qualitative factors. (Maximum 80 words) (3% marks) QUESTION 5 In downtown Clutchmore lies a famous French restaurant by the name of Parisian Restaurant Ltd. The establishment is owned and managed by Chef Albert. One of the signature products of the restaurant is its gourmet cakes, which is specially made in the restaurant's kitchen. The restaurant can make a maximum of 12,000 cakes per year. The company, however, is currently operating at 95% capacity. Each cake sells for $100. The variable costs based on the current 95% capacity are as follows: Direct materials Direct labour Variable overhead $ 456,000 $ 57,000 $ 171,000 $ 684,000 The fixed costs per year consist of the following: Fixed overhead Administration $ 130,000 $ 510,000 $ 640,000 Consider the following independent scenarios: Scenario A Grand Emporium Ltd has approached Parisian Restaurant Ltd to purchase 2,000 cakes for its promotional activities. As this is an unusually large order, Grand Emporium Ltd is only willing to pay a discounted total price of $180,000. They have also requested for the cakes to be packaged in specially made gift boxes which include the logos of both companies. This will incur an additional $3 variable cost per cake. The cheapest packing machine that can package the cakes to meet the requirement of Grand Emporium Ltd costs $12,000. Apart from the special order, there is no further use of this machine Scenario B Assembly Square Bakery has approached Parisian Restaurant Ltd to produce all cakes currently produced for the entire year for $102 per cake. As the buy option includes all necessary marketing and administration, Parisian Restaurant Ltd can reduce $500,000 of its fixed costs. Required: a) For Scenario A: (i) Calculate the incremental benefit (or cost) of the special order. (3% marks) (ii) Should Parisian Restaurant Ltd accept the special order? Discuss quantitative and qualitative factors. (Maximum 80 words) (3% marks) b) For Scenario B: (i) Prepare a table to compare the costs of the make and buy options. (2% marks) (ii) Should Parisian Restaurant Ltd continue making the cakes or buy them from Assembly Square Bakery? Discuss quantitative and qualitative factors. (Maximum 80 words) (3% marks)
