You have been notified by your purchasing department that the availability of one of the substantial ingredients of your menu item is impacted by an unusually cold and snowy winter for a period of at least six months. The cost of the ingredient will now increase by 30%. This unexpected supply chain issue has created havoc for budgeted profits and costs. Create a “before and after” computation scenario to show how the impact of this change will impact operating income assuming all other variables remain constant. Review Exhibit 7-1 for a sample computation format (Datar & Rajan, 2018, p. 251).

In a business with slim margins, 30% is tough to absorb even on a short run basis. How might your company be able to react to the change? Are there opportunities to offset this extra cost with a price increase, maintain gross margin, or offer the product to consumers at the same price currently? Model alternatives and present your calculations and solution in a supporting table included in your paper.
  

Level 1 Analysis Actual Static-Budget Static Budget (3) Results Variances (1) (2) = (1) - (3) 2,000 U $190,000 U Units sold 10,000 12,000 Revenues $1,250,000 $1,440,000 Variable costs 621,600 198,000 130,500 950,100 299,900 285,000 $ 14,900 Direct materials 98,400 F 6,000 U 13,500 F 105,900 F 84,100 U 9,000 U $ 93,100 U 720,000 192,000 144,000 1,056,000 384,000 276,000 $ 108,000 Direct manufacturing labor Variable manufacturing overhead Total variable costs Contribution margin Fixed costs Operating income $ 93,100 U Static-budget variance F = favorable effect on operating income; U = unfavorable effect on operating income. %3D