revelant costing,cost based pricing,cost behavior,

Project Description:

nofat manufactures one product, olestra, and sells it to large potato chip manufactures as the key ingredient in nonfat snack foods, including ruffles, lays, doritos, and tostitos brand products. for each of the past three years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. therefore, the company has ended each year with significant unused capacity. due to a short shelf life, nofat must sell every pound of olestra that it produces each year. as a result, nofat’s controller, allyson ashley, has decided to seek out potential specials sales offers from other companies. one company, patterson union (pu) a toxic waste cleanup company-offered to buy 10,000 pounds of olestra from nofat during december for a price of $2.20 per pound. pu discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as superfund sites by the u.s. environmental protection agency. allyson was excited, noting “this is another way to use our expensive olestra plant!”
this annual costs incurred by nofat to produce and sell 100, 000 pounds of olestra are as follows
variable cost per pound:
direct materials 1.00
variable manufacturing overhead 0.75
sales commission 0.50
direct manufacturing labor 0.25
total fixed costs:
advertising $3,000
customer hotline service 4,000
machine set-ups 40,000
plant machinery lease 12,000

• in addition, allyson met with several of nofat’s key production managers and discovered the following information: the special order could be produced without incurring any additional marketing or customer services costs.
nofat owns the aging plant facility that is used to manufacturing olestra
nofat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. the total set-up costs shown in the previous table represent the production of 20batches during the year.
nofat leases its plant machinery. the lease agreement is negotiated and signed on the first day of each year. nofat currently leases enough machinery to produce125, 000 pounds of olestra.
pu requires that an independent quality team inspects and facility from which it makes purchases. the terms of the special sales offer would require nofat to bear the $1,000 cost of the inspection team.
1. conduct a relevant analysis of the special sales offer by calculation the following:
a) the relevant revenues associated with the special sales offer.
b) the relevant cost associated with the special sales offer.
c) the relevant profit associated with the special sales offer
a) the relevant revenues associated with the special sales offer
10,000 pounds*2.20 = 22000 relevant revenue
b) the relevant costs associated with the special sales offer
variable cost fixed cost

direct materials 1.00 direct materials 1.00
direct labor 0.25 direct labor 0.25
v manufacturing overhead 0.75 vmoh 0.75
2.00 *10,000 =20000 machine set-up 40,000

c) the relevant profit associated with the special sales offer
22,000-21,000 = 1000
2. based solely on financial factors, explain why nofat should accept or reject pu’s special sales offer.
accept the order it is a $1,000 profit.
3. describe at least on qualitative factor that nofat should consider, in addition to the financial factors, in making its final decision regarding the acceptance of rejection of the special sales offer.
reject the offer, it’s like double charging or overpricing for the same labor.
cost based pricing
Skills Required:
Project Stats:

Price Type: Negotiable

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