Question

4. Gooding Foods makes Goody-Goody brand peanut butter. The cost to make each jar is $2.05 and consists of the following: Direct material Direct labor Variable overhead Fixed overhead $1.00 0.25 0.30 0.50 A grocery store chain wants to purchase a generic brand peanut butter from Gooding and is willing to pay S1.50 per jar. The generic peanut butter will be made using a different recipe, lowering the direct materials cost to $0.80 per jar. Gooding can produce this special order using excess capacity; therefore, fixed costs will not increase. Use differential analysis to determine whether Gooding should accept this special order.

Answer 1

In the given scenario the company requires to know whether to accept the offer of the grocery store

so, in this case, the selling price is restricted to $1.5 per unit

the cost for making the special order will be

direct material = $0.80

direct labour = $0.25

variable cost = $0.30

so total cost per unit = 0.80 + 0.25 +0.30 = $1.35

The company may accept the offer since the company will be earning a profit of 0.15 dollars per unit in the special order.

NOTE

• the direct material is 0.8 as given
• direct material is allocated to a unit so the per unit rate will be constant
• the per unit rate of variable cost will be also constant
• fixed costs are not taken into consideration as the cost has been already allocated to the normal jars