Reference no: EM133126164

Question - Janice is exploring ways to combat reduced production due to the cocoa shortage. She is considering outsourcing production of the tortes that she is unable to produce. The unit costs for producing tortes in-house are shown below.

Tortes

Demand 60,000 tortes

Sales price $40.00

Variable cost 24.00

Contribution margin $16.00

The bakery she has contacted agreed to provide the tortes at a cost of $36 per torte. Janice would continue to incur variable selling and administrative costs of $6.00 per torte.

Janice believes that outsourcing only the 30,000 tortes she can't fulfill in-house will cause additional administrative work because the company will have to keep track of which customers receive in-house baked tortes and which customers receive outsourced tortes to meet federal food safety guidelines. She is also concerned that if a customer receives both in-house and outsourced tortes in the same order, the customer may perceive an inconsistent quality and taste, a perception that would be harmful to the bakery's reputation. Therefore, she is considering outsourcing the entire 60,000 tortes. By outsourcing the torte production, Janice will save $90,000 in avoidable fixed costs.

Calculate the contribution margin Janice will earn from outsourcing the torte production.

Janice has been developing a new brownie recipe, and if she outsources the torte production she will be able to produce the new line of brownies on the freed-up equipment. She estimates that the brownies would generate $275,000 in annual contribution margin. All resources originally dedicated to torte production would be used in the production of brownies.

Calculate the contribution margin Janice will earn if she outsources torte production and uses the freed up equipment to produce brownies.