Integrative Exercise

Relevant Costing, Cost-Based Pricing, Cost Behavior, and Net Present Value Analysis for NoFat

Special Sales Offer Relevant Analysis

NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat's controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that "This is another way to use our expensive olestra plant!"

The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows:

Variable costs per pound:

Direct materials

$ 1.00

Variable manufacturing overhead

0.75

Sales commissions

0.50

Direct manufacturing labor

0.25

Total fixed costs:

Advertising

$ 3,000

Customer hotline service

4,000

Machine setups

40,000

Plant machinery lease

12,000

In addition, Allyson met with several of NoFat's key production managers and discovered the following information:

1The special order could be produced without incurring any additional marketing or customer service costs.

2NoFat owns the aging plant facility that it uses to manufacture olestra.

3NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year.

4NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra.

5PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team.

Required:

1. Conduct a relevant analysis of the special sales offer by calculating the following:

a. The relevant revenues associated with the special sales offer

$

fill in the blank 1

b. The relevant costs associated with the special sales offer

$

fill in the blank 2

c. The relevant profit associated with the special sales offer (Enter loss, if any, as negative amount.)

$

fill in the blank 3

Integrative Exerclse Relevant Costing, Cost-Based Pricing, Cost Behavior, and Net Present Value Analysis for NoFat: Special Sales Offer Relevant Analysis Nofat manufactures one product, olestra, and selis it to large potato chip manufacturers as the key ingredient in nonfat snack foods, induding Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must seil every pound of olestro that it produces each year. As a result, Nofat's controller, Allyson Ashley, has decided to seek out potential speciai sales offers from ether componies. One company, Patterson Union (PU)-a toxdc waste cleanup company-offered to buy 10,000 pounds of olestra from Nofat during December for a price of $2.20 per pound. FU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locatons designated as Superfund 5 tes by the U.S. Environenental Protection Agency. Alyson was exieited, noting that "This is another way to use our expensive olestra plantl" The annwal costs incurred by NoFat to prodice and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of Nofat's key production mansgers and discovered the folloning informations: 1. The special order could be produced without incurring any additional marketing or cuatemer servlce costs 2. Nofat owns the aging plant fachty that it uses to mamufacture olestrs. In addition, Allysen met with several of NoFat's key production managers and discovered the following information: 1. The special order could be produced without incurring any additional marketing or customer service costs. 2. NoFat owns the aging plant faclity that it uses to manufacture olestra. 3. Nofat incurs costs to set up and dean its machines for each production run, or batch, of olestra that if produces. The total sefup costs shown in the previous table represent the production of 20 batches during the year. 4. NoFat leases its plant machinecy. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. 5. PU requires that an independent quality team inspects any faclity from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team