Using the information in Table MA.4, advise the marketing director on whether it
ID: 2573239 • Letter: U
Question
Using the information in Table MA.4, advise the marketing director on whether it
would be more beneficial to make fruit and nut bars rather than buy them in from
another company for £1.70 per bar. What other considerations need to be taken into
account?
Table MA.1 Volume chocolate bars
Selling price per bar £
Cocoa
grams per
bar
Sugar
grams per
bar
Milk
millilitres
per bar
Dark
80,000
2.00
170
30
0
Milk
140,000
1.80
130
40
30
White
60,000
2.00
0
70
130
Raw material costs
£4 per kg
£2 per kg
£1 per litre
Table MA.2
Indirect costs*
£k
Rent
18.2
Utilities
13.8
Factory administration
12.7
Marketing and sales
47.4
Administrative salaries
38.5
factory indirect costs are currently allocated on a blanket rate.
Packaging is estimated at £200 per 1,000 bars.
Direct labour costs are expected to be £10 per hour.
Table MA.3 Sales director’s volume and price assumptions
Increase price
Decrease volume
Dark chocolate bars
10%
10%
Milk chocolate bars
5%
5%
White chocolate bars
No change
No change
Table MA.4 Fruit and nut: raw material costs
Per bar
Quantity
Cost
Cocoa, sugar, and milk
Assume 50% of milk bar
Fruit
50g per bar
£4 per kg
Nut
50g per bar
£8 per kg
Direct labour, packaging,
and factory overhead
Cost per bar: use same assumptions
as other chocolate bars
Table MA.1 Volume chocolate bars
Selling price per bar £
Cocoa
grams per
bar
Sugar
grams per
bar
Milk
millilitres
per bar
Dark
80,000
2.00
170
30
0
Milk
140,000
1.80
130
40
30
White
60,000
2.00
0
70
130
Raw material costs
£4 per kg
£2 per kg
£1 per litre
Explanation / Answer
Marketing Director's Fruit and nut (make or Buy) Raw Materials /unit Cocoa---4/1000*65 0.26 Sugar ----2/1000*20 0.04 Milk---- 1/1000*15 0.015 Fruit---4/1000*50 0.2 Nut--- 8/1000*50 0.4 R/Mat.cost/unitTotal 0.915 Direct labor 1/20*$ 10 0.5 Total direct costs 1.415 Packaging 200/1000 0.2 Total variable costs 1.615 Incremental cost to make/bar 1.615 Purchase price from outside co. 1.7 savings /bar 0.085 BENEFICIAL to make. Other considerations in making: 1. Certainty that there is market for this product 2. Additional labor hours -- Unused capacity & alternate utilisation of employees ,or may have to face the displeasure of existing employees. 3. Assuming no increase in any fixed costs
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