Sweet Wave Bakery normally produces sourdough bread on a regular basis. It sells approximately 35,000 of this type of bread each year for $3.90 per loaf. The variable costs for each loaf of bread are $2.30. Sunshine bakery in Miami has not been able to produce enough sourdough bread loaves to meet customer demands. They would like to purchase 15,000 loaves for $2.60 per loaf. Sweet Wave's sourdough bread line is near full capacity. In order to accept the order from Sunshine, Sweet Wave would have to temporarily add a 3^rd shift to their sourdough line. This would increase the variable manufacturing costs by $.30 per loaf but variable selling costs would decrease by .20 per loaf.

A restaurant has requested to purchase a special order of the sourdough bread. They are requesting 2,000 loaves. Sweet Wave has the capacity for this order without adding the additional shift. The restaurant is willing to pay $3.10 per loaf of bread.

Instructions

Part 1

Given the information above:

(a) What are the consequences of Sweet Wave agreeing to provide the 15,000 units to Sunshine Bakery? Would this be a wise "special order" to accept?

(b) Should Sweet Wave accept the special order from the restaurant?

(c) What would be the consequences of accepting both special orders?

Part 2

Sweet Wave has discovered that its cherry pie filling it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. Sweet Wave has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Sweet Wave needs 460,000 of these units each year.

If Sweet Wave decides to buy the filling, rather than producing it, they can shift the machinery and labor to making a special gluten free pie crust it now buys from another company. Sweet Wave uses approximately 500 gluten-free crusts each year. Currently, the cost to purchase the gluten-free crust is $12.66. To aid in the production of this unit, Sweet Wave would need to purchase a new machine at a cost of $2,345. Using this machine would lower the cost of the producing the gluten-free crust to $9.90 a unit.

Instructions

Given the information above:

(a) Without considering the possibility of making the gluten free pie crust, evaluate whether Sweet Wave should buy or continue to make the cherry pie filling.

(b) (1) What is Sweet Wave's opportunity cost if it chooses to buy the cherry pie filling and start manufacturing the gluten free pie crust?

(2) Would it be wise for Sweet Wave to buy the cherry pie filling and manufacture the gluten free pie crust? Explain.

Part 3

Sweet Wave Bakery has a machine that is continuing to bread down and requires constant maintenance. The operations manager is estimating that this machine has only 2 more years of life.The machine produces an average of 50 units per day at a cost of $6.50 per unit with a sales price of $8.50 per unit. The bakery is considering replacing this machine with a similar machine. The new machine would cost $55,000 with a 2 year life but could produce twice the production of the existing machine. The units sell for $8.50. Sweet Wave operates the line with this machine 260 days each year. The sales are equal to production on this line.

Instructions

Given the information above, what are the consequences of Sweet Wave replacing the machine that is slowing down production because of breakdowns?