Reference no: EM133179342

Question - The following information pertains to Quality Food Service for the first two quarters of a year.

Mary's Food Service
	First Quarter	Second Quarter
Sales at $4.80 per meal	$36,000	$63,000
Total costs	62,000	80,000
Income (loss)	($26,000)	($17,000)

Each dollar of variable costs comprises of 50 percent direct labor, 25 percent direct materials, and 25 percent variable overhead costs. Quality expects price per unit, variable cost per unit, and total fixed costs to remain at the same level in the third quarter as during the first two quarters. Quality also expects the sales level in the third quarter to be the same as in the second quarter. Quality sold 13,125 meals in the second quarter.

Required - Calculate the following:

1. What is the break-even point in meals (units) in a quarter?

2. The company just received a special order from a government agency that provides meals for senior citizens for 7,500 meals at a price of $4.30 per meal in the third quarter. If the company accepts the order, it will not affect the regular market for 13,125 meals in the third quarter. Moreover, if the company accepts the order, direct labor costs per meal will increase by 15 percent for all meals produced because of the need to hire and use new labor, and fixed costs will increase by $3,000 per quarter. Should it accept the government order?

3. Suppose the company believes that such orders from government agencies can become part of routine business. It expects that for every four meals it sells to its regular (i.e., existing) customer base at $4.80 per meal, it can sell two meals to government agencies at $4.30 per meal. The company expects that this sales mix will remain steady. As in part 2., if the company makes both types of meals, direct labor costs per meal will increase by 15 percent for all meals produced, and the fixed costs will increase by $3,000 per quarter. How many total meals will the company have to make and sell in a quarter in order to break-even in this case? How many of these meals will represent sales to regular customers? In your opinion, will the company lose or benefit from adding this new line of business?

4. This part is unrelated the parts 1-3 above. In class, we discussed two broad approaches to break-even analysis in setting with multiple products. The first approach is to first allocate the common fixed costs to individual products on some basis, and then conduct break-even analysis on a product-by-product basis. The second approach is to assume a certain "product mix" and compute the break-even point without having to allocate common fixed costs. Which method is theoretically more appealing and why?