A grocery retail store owns an in-house bakery. The bakery is considering two different ovens for baking
Question:
A grocery retail store owns an in-house bakery. The bakery is considering two different ovens for baking baguettes. The first oven is less energy efficient, with fixed costs of $10,000 per year and variable costs of $0.50 per baguette. The second (more capital-intensive and more energy-efficient) oven has fixed costs of $30,000 per year but has variable costs of $0.25 per baguette. The bakery expects to sell the baguettes at $3.00 per unit. a. What are the cross-over quantity and cost? Based on the demand forecast, if the expected annual sales is 75,000 baguettes, which process would you choose? Using an appropriately labeled diagram, plot the two cost lines on a single graph illustrating the crossover point.
Now suppose that the grocery store is considering a third option - outsourcing the baguettes at a cost of $2.5 per baguette. Identify the approximate range over which outsourcing provides the lowest cost. If the grocer anticipates selling 100,000 baguettes per year, would you suggest outsourcing? Why? Using an appropriately and clearly labelled diagram, plot the three total cost lines on a single graph illustrating the crossover points. Identify on the graph the approximate range over which each option provides the lowest cost.
Accounting Information Systems
ISBN: 978-1260153156
2nd edition
Authors: Vernon Richardson, Chengyee Chang, Rod Smith