Reference no: EM133115958
Question - Tischler the Honey Man (THM) purchases honeycombs from beekeepers for $4.40 per kilogram. THM 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 $3.30 per kilogram.
Page 448The honey can be sold in raw form for $6.60 per kilogram. However, some of the raw honey is used by THM 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 $9.60.
Each container of honey drop candies contains three-quarters of a kilogram of honey. The other variable costs associated with making the candies are as follows:
Decorative container $0.90
Other ingredients 0.55
Direct labour 0.45
Variable manufacturing overhead 0.20
Total variable manufacturing cost $2.10
The monthly fixed manufacturing overhead costs associated with making the candies follow:
Master candy maker's salary $4,180
Depreciation of candy-making equipment 460
Total fixed manufacturing cost $4,640
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 $2,750 per month plus a commission of 5% 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.
Required -
1. What is the minimum number of containers of candy that must be sold each month to justify the continued processing of honey into candies? Support your answer with relevant computations.
2. Assume that TMH currently sells 4,000 containers of honey drop candies and believes that it can sell 5,000 containers provided it increases the sales commission paid to salespersons. What is the maximum sales commission it can pay (as percentage of sales revenue) in order to be no worse off in terms of its current profitability?