$($L$.$O $4-1,2)4-35.$ Pricing Decisions

Mother's Bottlers, Inc., is a small bottling company that bottles and sells cold teas for $$5$ per

unit. The cost of each unit follows:

One of Mother's regular customers asked the company to fill a special order of $2,000$ units

at a selling price of $$3\mathrm{.}50$ per unit. Mother's can fill the order using existing capacity without

affecting total fixed costs for the month. However, Mother's manager was concerned about

selling at a price below the $$4\mathrm{.}00$ cost per unit and has asked for your advice.

Required

a$.$ Prepare a schedule to show the impact of providing the special order of $2,000$ units on

Mother's profits in addition to the regular production and sales of $20,000$ units per month.

b$.$ Based solely on the data given, what is the lowest price per unit at which the bottled teas

could be sold for the special order without reducing Mother's profits?

c$.$ What other factors might Mother's managers want to consider in setting a price for the

special order?$4-42.$ Make$-$or$-$Buy Decisions

Mel's Meals $2$ Go purchases cookies that it includes in the $10,000$ box lunches it prepares and

sells annually. Mel's kitchen and adjoining meeting room operate at $70$ percent of capacity.

Mel's purchases the cookies for $$0\mathrm{.}60$ each but is considering making them instead. Mel's can

bake each cookie for $$0\mathrm{.}20$ for materials, $$0\mathrm{.}15$ for direct labor, and $$0\mathrm{.}45$ for overhead without

increasing its capacity. The $$0\mathrm{.}45$ for overhead includes an allocation of $$0\mathrm{.}30$ per cookie for

fixed overhead. However, total fixed overhead for the company would not increase if Mel's

makes the cookies.

Mel himself has come to you for advice. $"$It would cost me $$0\mathrm{.}80$ to make the cookies, but

only $$0\mathrm{.}60$ to buy. Should I continue buying them?" Materials and labor are variable costs, but

variable overhead would be only $$0\mathrm{.}15$ per cookie. Two cookies are put into every lunch.

Required

How would you advise Mel? Prepare a schedule to show the differential costs.