Short-run pricing, capacity constraints. Colorado Mountains Dairy, maker of specialty cheeses, produces a soft cheese from the
Short-run pricing, capacity constraints. Colorado Mountains Dairy, maker of specialty cheeses, produces a soft cheese from the milk of Holstein cows raised on a special corn-based diet. One kilogram of soft cheese, which has a contribution margin of $10, requires 4 liters of milk. A well-known gourmet restaurant has asked Colorado Mountains to produce 2,600 kilograms of a hard cheese from the same milk of Holstein cows. Knowing that the dairy has sufficient unused capacity, Elise Princiotti, owner of Colorado Mountains, calculates the costs of making one kilogram of the desired hard cheese:
Milk (8 liters * $2.00 per liter)...........$16
Variable direct manufacturing labor.........5
Variable manufacturing overhead.........4
Fixed manufacturing cost allocated............6
Total manufacturing cost............$31
1. Suppose Colorado Mountains can acquire all the Holstein milk that it needs. What is the minimum price per kilogram it should charge for the hard cheese?
2. Now suppose that the Holstein milk is in short supply. Every kilogram of hard cheese produced by
Colorado Mountains will reduce the quantity of soft cheese that it can make and sell. What is the minimum price per kilogram it should charge to produce the hard cheese?Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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