1. The meat pie, a hand-sized pot pie made with pastry and filled with minced (ground) beef and gravy, is consumed as a takeaway food snack in Australia (see Exhibit 1 for an illustration of a meat pie). Accord- ing to some observers, it is iconic in Australian culture and has been described by former New South Wales Premier Bob Carr as Australias national dish.2 The average Australian will consume an average of 45 meat pies per year, and the popular brand FourN Twenty Pie produces 50,000 pies per hour. The meat pie is heavily associated with Australian Rules football, rugby league, and other sports as one of the most popular consumables while watching a game.3 The meat pie is about four inches in diameter and traditionally eaten in the hands with tomato sauce (aka tomato ketchup) and is usually accompanied by a cold beer.4 The pie has a short crust bottom and flaky pastry top (see Exhibit 2 for a meat pie recipe).

Amphlett and Ferris used the kitchen in their home to develop more than 100 variations of the meat pie recipe, which they tested on friends and family. Finally, they hit upon a recipe which maintained the flavor of the authentic meat pie but contained less fat and sodium. Based on commercial prices, they estimated that the ingredients for the pie pastry and the filling such as ground beef, onions, flour, butter, and sauces, etc., would cost $1.20 per pie. Based on the production research in their home kitchen, they estimated that the amount of utilities consumed in making the pies would cost about $0.03 per pie. After conducting extensive surveys of passing customer traffic at Pike Place Market, they agreed that a reasonable initial sales price was $3.25 per pie, comparable to other fast foods such as burgers and hotdogs, which competed for customers fast food dollars. Based on quotes from an industrial supplier, they estimated that it would cost $0.02 per pie for each pie box used for customer packaging at the point of sale. The entrepreneurial team felt that the ideal location in Seattle was a destination frequented by tourists who would be more likely to try new exotic foods. Market research suggested that Seattles Pike Place Market on the Seattle waterfront close to Puget Sound ferries had excellent tourist traffic, particu- larly among the younger visitors. Discussions with commercial property managers prominent in Pike Place Market revealed that a large store of 4,000 square feet and the capacity to produce and sell 30,000 pies per month could be rented for $11,900 per month. Renting cooking equipment and fixtures would cost $8,000 per month and $5,000 per month, respectively. Amphlett and Ferris came up with a design for each store in which the meat pies would be made at the back of the store with a glass wall panel separating the front section so that customers could see the spotlessly clean facilities in which the pies were made. They felt that this would enhance the custom- ers perception that Aussie Pies was a premium product using high quality ingredients and produced under impeccably sanitary conditions. Making meat pies at the store would require two full-time chefs at $1,800 per month. Only one full-time sales assistant would be needed at a monthly salary of $1,200 per month. Utility costs for lighting the store during business hours were estimated to be $300 per month.

Assume that after the successful business operation in the first year the owners decided to change their location in the next year. After some careful investigation of various options the owners decided to set up their selling store in Alki Beach, Seattle. For this new selling store, they now have to pay a rental of $1000 per month. Their previous store will now be fully used for the production of meat pies from where they will deliver the pies to the final selling destination, the Alki beach. For the customers sitting arrangement on the beach, the owners decided to purchase some tables and benches; $120 per table & bench set X 10 = $12,000. The table and bench sets are expected to last next 5 years. From next year the two owners also decided to take fixed salary of $1000 each. Also the owners decided to give the sales personnel $.50 commission per pie sold, besides giving them fixed salary. Furthermore, in order to keep the pie production space meticulously clean the owners now want to spend $200 for supplies per month. The other costs given in the case (from first year of operation) will remain the same. a) Calculate the monthly fixed manufacturing overhead cost for the production of meat pies. [1] b) Calculate the monthly fixed selling and administrative cost. [1] c) Calculate the variable per unit cost of production of meat pies. [1] d) Calculate the per unit selling and administrative cost. [1] f) In the next year the owners have decided to sell 25,000 pies in the first month of operation. Calculate the margin of safety percentage based on this information. Also interpret the result. [1+1] g) Consider the following information of January and February. And prepare income statement of January & February based on both variable costing and absorption costing. [2+2]