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Stanley's Patties Limited has been baking beef patties since 1945. Stanley's Patties Limited bakes patties and other pastries, however, patties are its flagship product. The
Stanley's Patties Limited has been baking beef patties since 1945. Stanley's Patties Limited bakes patties and other pastries, however, patties are its flagship product. The company uses throughput costing to evaluate its performance. Meanwhile, its main competitor, Butterflakes Bakery Limited employs a demand based pricing system for its products. Patties are the most profitable product it bakes which requires three labour hours per unit. Labour hours are limited due to shortage of skilled bakers. The shortage is attributed to the recent migration to the United States of America. Currently the company has 50 employees who work eight hours per day. The entity operates five days per week and fifty weeks per year. Each of Stanley's patties can be sold for $250 and requires baking flour, baking powder and beef which are the only direct material. Each patty requires quarter kilogram of baking flour, quarter kilogram of baking powder and quarter kilogram of beef. The average market prices are $120 per kilogram, $40 per kilogram and $240 per kilogram for baking flour, baking powder and beef respectively, Stanley bakery has been using throughput costing since its inception, but the marketing manager has proposed demand based pricing method as a viable alternative. The total operating expenses are $400,000 per week. As mentioned previously, its competitor uses a demand-based pricing system. Butterflakes Bakery Limited (the competitor) has an annual fixed cost that is half of Stanley's annual operating costs. Additionally, its variable cost per units for each patty include direct material and direct labour. Each of Butterflakes's patties requires one hour of direct labour which is on average $30 per hour; While, patties require direct material of $120 per unit. Butterflakes Bakery sells a patty for $10 more than Stanley Patty and at this price, 100,000 units are sold annually. However, if it sells at Stanley's price, demand is expected to increase by 10,000 units. Required: (a) Outline the steps in the method proposed by the marketing manager (4 marks) (b) Calculate the throughput accounting ratio (TPAR) and advise management. (6 marks) (c) Calculate Butterflakes Bakery Limited optimal output, optimal price and prepare a marginal costing income statement depicting optimal profit. (15 marks)
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