Solution to Question 7

Topics: Variable cost, Costs, Contribution margin Pages: 12 (1886 words) Published: May 30, 2013
7-17Healthy Hearth has sufficient excess capacity to handle the one-time order for 1000 meals next month. Consequently, the analysis focuses on incremental revenues and costs:

|Incremental revenue per meal |$3.50 | |Incremental cost per meal | 3.00 | |Incremental CM per meal |$0.50 | |Number of meals |1,000 | |Increase in operating income |$ 500 |

7-18 This order will require 500 (= (10,000/100)*5) machine hours. Since there is excess capacity of 800 (= 4,000*(100%-80%)) machine hours per month, Shorewood Shoes Company can accept this order without expanding its capacity. Therefore, Shorewood should charge at least as much as the incremental variable costs for this order.

Direct material $6.00
Direct labor $4.00
Variable manufacturing support $2.00
Additional cost of embossing the private label $0.50
Minimum price to be charged for this order$12.50

Shorewood’s costs stated in the problem are average costs per pair of shoes. Shorewood should determine whether the costs are reasonably accurate for the discount store’s order. Shorewood should also consider how its regular customers might react to the lower price offered to the discount store.

7-19 (a) Superstore faces a problem of maximizing contribution margin per unit of scarce resource. Here, the scarce resource is shelf space. Superstore requires at least 24 square feet for each category. The store manager should assign additional space to the category with the highest contribution margin per square foot.

| |Ice Cream |Juices |Frozen Dinners |Frozen Vegetables | |Selling price per unit |$12.00 |$13.00 |$24.00 |$9.00 | |Variable costs per unit |$8.00 |$10.00 |$20.50 |$7.00 | |CMU (per sq. ft. package) |$4.00 |$3.00 |$3.50 |$2.00 | |Minimum required |24 |24 |24 |24 | |Maximum allowed |100 |100 |100 |100 | |Allocation: Maximize CM |100 |26 |100 |24 |

The ice cream is the product with the highest contribution margin per square foot package. After assigning a total of 100 square feet to ice cream, there is sufficient available shelf space to assign a total of 100 square feet to frozen dinners and 26 square feet to juices. The frozen vegetables receive the minimum required assignment of 24 feet.

(b) In setting the minimum required and maximum allowed square footage per category, the manager might consider seasonality (for example, permitting more ice cream space during the summer or more frozen vegetable space during the winter) and the effect on contribution margins of variability in costs and prices.

| |Regular |Deluxe | |Sale price per sq. yard |$16.00 |$25.00 | |Variable costs per sq. yard |$10.00 |$15.00 | |Contribution margin per sq. yard |$6.00 |$10.00...
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