Creative Catering prepares meals for several airlines, and sales average 150,000 meals per month at a selling
Creative Catering prepares meals for several airlines, and sales average 150,000 meals per month at a selling price of $25.32 per meal. The significant costs of each meal prepared are for the meat, vegetables, and plastic trays and utensils; no desserts are provided because the airlines are concerned about cost control. The company prepares meals in batches of 2,000. The following data are shown in the company’s accounting records for June 2010:
Cost of meat for 2,000 meals ...........$3,600
Cost of vegetables for 2,000 meals ......... 1,440
Cost of plastic trays and utensils for 2,000 meals ..... 480
Direct labor cost for 2,000 meals .......... 3,800
Monthly overhead charges amount to $1,200,000 and are fully fixed. Company management has asked you to answer the following items.
a. What is the cost per meal based on average sales and June prices?
b. If sales increase to 300,000 meals per month, what will be the cost per meal (assuming that the cost behavior patterns remain the same as in June)?
c. Assume that sales increase to 300,000 meals per month. Creative Catering wants to provide a larger meat portion per meal and has decided that, since the airlines are willing to incur the cost determined in part (a), the company will simply increase its per-unit spending for meat. If all costs other than meat remain constant, how much can Creative Catering increase its cost per meal for meat?
d. The company’s major competitor has bid a price of $21.92 per meal to the airlines. The profit margin in the industry is 100 percent of total cost. If Creative Catering is to retain the airlines’ business, how many meals must the company produce and sell each month to reach the bid price of the competitor and maintain the 100 percent profit margin? Assume that June cost patterns will not change and meals must be produced in batches of 2,000.
e. Consider your answer to part (d). Under what circumstances might the manager for Creative Catering retain the airlines’ business but cause the company to be less profitable than it currently is? Show calculations.
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