Analyze benefit of recalculating cost of pickle production

Reference no: EM132810871

Scenario

The Acme Pickle Company has distributed pickles under the "Florida's Best" brand for eight years from its production facility in Jacksonville, Florida. It sells the pickles to stores in the southeastern United States. Acme normally produces between 8,000 and 10,000 cases of pickles a month but has the capacity to produce 12,000 cases without adding equipment or personnel.
The owner of a twenty-store supermarket chain in Wisconsin, called Super Deals, visits friends in Florida and is impressed with the quality of "Florida's Best" pickles. He approaches you, an Acme Pickle account manager, with an offer to buy 2,000 cases of pickles to use in a special promotion at his stores. He is thinking of something such as:
"Free jar of Florida's Best pickles with every purchase of forty dollars or more-this month only!"
He offers Acme a price of $9.50 per case, knowing that it is a very substantial discount from the normal selling price of $20 a case. Acme's management is inclined to turn the offer down, because their cost is calculated at $10.00 a case. They believe they would lose money if they sold at $9.50 a case. You, on the other hand, believe that some errors have been made in the cost accounting.

Your analysis for the Controller and Sales Manager is needed to suggest a different way of calculating the pricing of the pickles that may be lower. As part of your analysis, address the following items:

Question 1: Explain why some production costs are variable and some are fixed.

Question 2: Analyze the benefit of recalculating the cost of pickle production.

Acme Pickle Company Cost Report Item Cost

Cucumbers$15,000

Spices and vinegar11,000

Jars and lids10,000

Direct labor, paid by the case30,000

Line supervisors, on salary10,000

Depreciation on factory10,000

Property taxes on factory3,000

Insurance on factory1,000

Total Costs:$90,000

Cost per case (9,000 cases produced) $10.00

Reference no: EM132810871

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