San Francisco Soughdough Bakery is a new bakery specializing in the traditional
ID: 2481958 • Letter: S
Question
San Francisco Soughdough Bakery is a new bakery specializing in the traditional San Francisco Soughdough Bread loaves. Each loaf has an average cost of $4. San Francisco Soughdough sells these loaves at $8 each. Currently, the bakery produces and sells 500 loaves per day. It can produce a total of 800 loaves per day at maximum capacity. A university across the Bay in Oakland offers to buy an extra 100 loaves per day for $3 each. If this special offer is accepted, the new average cost would be $3.50 for 600 loaves. 1. Should San Francisco Soughdough Bakery accept this offer? 2. What is the Fixed Cost for the Bakery? What is the Unit Variable Cost? 3. What considerations should be made before accepting this special offer? San Francisco Soughdough Bakery is a new bakery specializing in the traditional San Francisco Soughdough Bread loaves. Each loaf has an average cost of $4. San Francisco Soughdough sells these loaves at $8 each. Currently, the bakery produces and sells 500 loaves per day. It can produce a total of 800 loaves per day at maximum capacity. A university across the Bay in Oakland offers to buy an extra 100 loaves per day for $3 each. If this special offer is accepted, the new average cost would be $3.50 for 600 loaves. 1. Should San Francisco Soughdough Bakery accept this offer? 2. What is the Fixed Cost for the Bakery? What is the Unit Variable Cost? 3. What considerations should be made before accepting this special offer?Explanation / Answer
Solution:
1. Calculation of profit at diffrent levels of production:
500 loaves per day 600 loaves per day
Sales 4000 (500*8) 4300 (500*8 + 100*3)
- Cost 2000 (500*4) 2100 (600*3.5)
Profit 2000 2200
Therefore, San Francisco Soughdough Bakery should accept this offer.
2. Calculation of fixed and unit variable cost:
Unit variable cost = Change in total cost/change in qty sold
= 2100-2000/600-500
= 1 per unit
Total cost initially = 2000
Variable portion = 500 *1 = 500
Fixed Cost = 2000-500 = 1500
3. Before accepting the offer , the bakery should ensure that the selling price is such that it doesnot result in a reduction of profit ir loss. It should be able to cover the total average cost.
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