Charles is exploring ways to combat reduced production due to the flour shortage. He is considering outsourcing production of the tortes that she is unable to produce. The unit costs for producing tortes in-house are shown below.

	Tortes
Demand	60,000 tortes
Sales price	$40.00
Variable cost	24.00
Contribution margin	$16.00

The bakery he has contacted agreed to provide the tortes at a cost of $36 per torte. Charles would continue to incur variable selling and administrative costs of $6.00 per torte.

Charles believes that outsourcing only the 30,000 tortes he can't fulfill in-house will cause additional administrative work because the company will have to keep track of which customers receive in-house baked tortes and which customers receive outsourced tortes to meet federal food safety guidelines. He is also concerned that if a customer receives both in-house and outsourced tortes in the same order, the customer may perceive an inconsistent quality and taste, a perception that would be harmful to the bakery's reputation. Therefore, he is considering outsourcing the entire 60,000 tortes. By outsourcing the torte production, Charles will save $90,000 in avoidable fixed costs.

Calculate the total contribution margin Charles will earn from outsourcing the torte production. ROUND YOUR ANSWER TO WHOLE DOLLARS  DO NOT INCLUDE A $ IN YOUR ANSWER. INDICATE NEGATIVE NUMBERS WITH A MINUS SIGN (-).

$Question Blank 1 of 2

Charles has been developing a new brownie recipe, and if he outsources the torte production he will be able to produce the new line of brownies on the freed-up equipment. He estimates that the brownies would generate $275,000 in annual contribution margin. All resources originally dedicated to torte production would be used in the production of brownies.

Calculate the net effect on operating income if Charles outsources torte production and uses the freed up equipment to produce brownies. ROUND YOUR ANSWER TO WHOLE DOLLARS . DO NOT INCLUDE A $ IN YOUR ANSWER. INDICATE NEGATIVE NUMBERS WITH A MINUS SIGN (-).

 

Answer rating: 100% (QA)

Part 1 Contribution Margin from Outsourcing Tortes A Contribution Margin per Outsourced Torte Outsou... View the full answer