Does the cost estimate meet the companys requirements

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Reference no: EM133560844

Tofutti Brands now produces and sells a variety of plant-based and dairy-free products. The original Mintz's recipe for the Tofutti ice-cream is a registered trademark, therefore protected through trade secret. A new dairy-free ice-cream flavour has been developed. Steve Kass, current CEO of Tofutti Brands, wants to make sure that the new flavoured Tofutti ice-cream is priced competitively because its purchase is also likely to increase sales of other products. The company anticipates that it will sell 400,000 gallons of the new favoured ice-cream next year, with the following estimated costs:

Product design and trademark registration	$1,700,000
Ingredients	4,000,000
Direct production labour	1,600,000
Variable production overhead	400,000
Fixed production overhead	2,500,000
Fixed marketing	3,000,000

Required:

a) Management believes that it can successfully sell the new flavoured Tofutti dairy- free ice-cream for $45 a gallon. The company's target operating profit is 30% of the revenues. Calculate the target full cost of producing the 400,000 gallons. Does the cost estimate meet the company's requirements?

b) One of the ingredients is the nectar of a specific plant in South America. If the company could eliminate this ingredient, the cost of the ingredients would decrease by 25%. However, this would require changes in the trademark recipe and product design of $300,000 to engineer a chemical equivalent of that ingredient, which is compatible with the industrial mixers of the production process. Will this design change allow the new flavoured Tofutti dairy-free ice-cream to meet its target cost?

c) The company's CEO, Steve Kass, does not believe that the recipe should be altered for fear it will tarnish the company's trademark. He prefers that the company become more efficient in the production of the new flavoured Tofutti dairy-free ice-cream. If fixed production costs can be reduced by $250,000 and variable direct production labour costs are reduced by 1$ per gallon of ice-cream, will Tofutti Brands achieve its target cost?

d) Would you recommend that the company follow the proposed solution in requirement b) or requirement c)? Articulate your explanation.

Reference no: EM133560844

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