Lifsey Wedding Fantasy Company makes very elaborate wedding cakes to order. The

Question

Lifsey Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:
Activity Cost Pools Activity Rate
Size- related $0.94 per guest
Complexity- related $ 31.62 per tier
Order-related $ 55.79 per order
The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order). The activity rates include the costs of raw ingredients such as a flour, miniature statues and wedding bells, which are accounted for separately.
Data concerning two recent orders below:
Pyburn wedding Smith wedding
Number of reception guests 72 189
Number of tiers on the cake 4 5
Cost of purchased decorations for cake $29.92 $62.75
Assuming that all of the costs listed below are avoidable costs in the event that an order in turned down. What amount would the company have to charge for the pyburn wedding cake to just break even?
a) $279.87
b) $55.79
c) $29.92
d) $338.64

Explanation / Answer

If the cost is allocated on the basis of number of guests then definitely cost for fewer guest would go down. Cost will vary in direct relation with the number of guests. See the following details: Average no. of guests = (72 + 189) / 2 = 130.5 or 131 Total Costs Pyburn Smith Wedding Wedding Size related cost 0.94x72 $67.68 $177.66 (0.94x189) Complexity Related $31.62x4 $126.48 $158.10 ($31.62x5) Order-related $55.79x1 $55.79 $55.79 --------------------------- Total Cost $249.95 $341.55 $591.50 ================== Allocation on the basis of no. of guests $591.50 x 72/261 $163.17 $428.33 ($591.50x189/261) The cost reduces from $249.95 to $163.17 (due to number of guests 72 being less than average 131)

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