The Harrington Honey Company purchases honeycombs from beekeepers for $2.8 a pou
ID: 2598015 • Letter: T
Question
The Harrington Honey Company purchases honeycombs from beekeepers for $2.8 a pound. The company produces two main products from the honeycombs—honey and beeswax. Honey is drained from the honeycombs, and then the honeycombs are melted down to form cubes of beeswax. The beeswax is sold for $2.4 a pound.
The honey can be sold in raw form for $3.8 a pound. However, some of the raw honey is used by the company to make honey drop candies. The candies are packed in a decorative container and are sold in gift and specialty shops. A container of honey drop candies sells for $5.2.
Each container of honey drop candies contains three quarters of a pound of honey. The other variable costs associated with making the candies are as follows:
The monthly fixed manufacturing overhead costs associated with making the candies follow:
The master candy maker has no duties other than to oversee production of the honey drop candies. The candy making equipment is special-purpose equipment that was constructed specifically to make this particular candy. The equipment has no resale value and does not wear out through use.
A salesperson is paid $2,000 per month plus a commission of 4% of sales to market the honey drop candies.
The company had enjoyed robust sales of the candies for several years, but the recent entrance of a competing product into the marketplace has depressed sales of the candies. The management of the company is now wondering whether it would be more profitable to sell all of the honey rather than converting some of it into candies.
What is the incremental contribution margin per container from further processing the honey into candies? (Round your intermediate calculations and final answer to 2 decimal places.)
What is the minimum number of containers of candy that must be sold each month to justify the continued processing of honey into candies? (Round your intermediate calculations to 2 decimal places. Round your final answer to the nearest whole number.)
The Harrington Honey Company purchases honeycombs from beekeepers for $2.8 a pound. The company produces two main products from the honeycombs—honey and beeswax. Honey is drained from the honeycombs, and then the honeycombs are melted down to form cubes of beeswax. The beeswax is sold for $2.4 a pound.
The honey can be sold in raw form for $3.8 a pound. However, some of the raw honey is used by the company to make honey drop candies. The candies are packed in a decorative container and are sold in gift and specialty shops. A container of honey drop candies sells for $5.2.
Each container of honey drop candies contains three quarters of a pound of honey. The other variable costs associated with making the candies are as follows:
Explanation / Answer
Answer:
1
What is the incremental contribution margin per container from further processing the honey into candies
the selling price of a container of honey drop candies
5.2
a selling price of three-quarter of the pound of honey
=(3.8*3/4)
2.85
Incremental revenue per container
2.35
Decorative container
0.5
Other ingredients
0.3
Direct labor
0.25
Variable manufacturing overhead
0.15
Commission (4%*5.2)
0.208
Incremental variable cost per container
1.408
Incremental contribution per container
0.942
incremental contribution margin per container from further processing the honey into candies=$0.942
_________________________________________
b)
Avoidable fixed cost
Amount $
Master candy maker’s salary
4400
A salesperson is paid $2,000
2000
Avoidable fixed cost
6400
Avoidable
fixed cost
/
Incremental contribution per container
=
No of
candies
6400
/
0.942
=
6794
the minimum number of containers of candy that must be sold each month to justify the continued processing =6794 candies
the selling price of a container of honey drop candies
5.2
a selling price of three-quarter of the pound of honey
=(3.8*3/4)
2.85
Incremental revenue per container
2.35
Decorative container
0.5
Other ingredients
0.3
Direct labor
0.25
Variable manufacturing overhead
0.15
Commission (4%*5.2)
0.208
Incremental variable cost per container
1.408
Incremental contribution per container
0.942
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