Question

The Feed Barn packages and distributes three grades of animal feed. The material cost per ton and estimated annual sales for each of the products as follows.


The fixed cost of operating the machinery used to package all three products is $10,000 per year.
In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tons. The resulting full costs (material costs plus allocated fixed operating cost) are then marked up 100%. The Feed Barn has received an offer from a foreign firm for 1,000 tons of the premium grade feed. Sales to the foreign firm would not affect domestic sales, but would require an increase in fixed production costs of $2,000.

REQUIRED
A. Which type of non-routine operating decision is involved here? What are the managers’ decision options?
B. What relevant quantitative information is required for this type of decision?
C. Using only quantitative information, what is the minimum price that the Feed Barn’s managers should be willing to accept from the foreign firm?
D. What types of qualitative factors would the Feed Barn’s managers typically consider before agreeing to the sale?Explain.


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  • CreatedJanuary 26, 2015
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