Le Grange Hotels Limited requires 40,000 cartons of food item per year. At the beginning of the
Question:
Le Grange Hotels Limited requires 40,000 cartons of food item per year. At the beginning of the current year the purchase department expects the purchase price @ Sh. 900 per carton while the accounting department estimated the incremented cost processing an order is Sh. 1350 and the cost of refrigerating every carton of food item is estimated to be Sh. 12 per unit. But the costing department is against the incremental processing cost of Sh. 1350 per carton rather according to it, this should have been Sh. 880. At the commencement the supplier offers 40,000 cartons @ Sh. 860 per piece if the order is made once.
The Food item will be delivered immediately and placed in the stores. One of the directors of the directors of the company says that 'due to present communication system the incremental cost of placing an order is zero but the accounting department's original estimate of Sh. 1350 for placing an order for economic batch is correct. After a series of discussions of the departmental heads company reached to decision not to buy 40,000 cartons at once
Required:
Do you agree with the company's decision? Why? (4 Marks)
What is the total cost, when incremental cost process on order is Sh. 1350 per carton? (3 Marks)
What is the total cost, when incremental cost processing an order is Sh. 880? (3 Marks)
Intermediate Accounting
ISBN: 978-0324659139
11th edition
Authors: Loren A. Nikolai, John D. Bazley, Jefferson P. Jones