Part 1
Baker Consolidated
Baker Consolidated operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of $4,700 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging $12,000 per month.
Baker has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40% greater than current sales, because the machines are available at all hours. By replacing the cafeteria with vending machines, Baker would receive 16% of gross customer spending and avoid all cafeteria costs. In a poll, employees did not express a preference for one option over the other.
In a1- to 2-pagedocument, explain the impact of this decision. Be sure to address the following:
- How much does monthly operating income change if Baker Consolidated replaces the cafeteria with vending machines? Explain using linear profit modeling calculations.
- What recommendation would you make for Baker Consolidated’s managers considering this decision? Justify your response.
- In your recommendation, be sure to calculate how the monthly operating income changes if the company replaces the cafeteria with vending machines.
Note:In preparing your final submission, be sure to include your Week 4 Assignment template with your 1- to 2-page document submission.
Part 2
Barnwell Brothers Company
Data for the Barnwell Brothers Company are as follows:
Sales (100,000 units)
| | | $500,000 |
Costs
|
Fixed
|
Variable
| |
Raw material
| $ 0 | $150,000 | |
Direct labor
| $0 | $100,000 | |
Factory costs
| $50,000 | $75,000 | |
Selling and administrative costs
| $55,000 | $25,000 | |
Total costs
| $105,000 | $350,000 | $455,000 |
Operating income
| | | $45,000 |
In a1- to 2-pagedocument, address the following based on the provided company cost data:
- What is the break-even sales in units?
- If Barnwell Brothers is subject to an effective income tax rate of 40%, how many units would Barnwell Brothers have to sell to earn an after-tax profit of $90,000?
- If fixed costs increase $31,500 with no other cost or revenue factors changing, what is the break-even sales in units?
- How would these calculations affect decision making for managers at Barnwell Brothers? Why?
- What recommendation(s) would you suggest for reducing costs at Barnwell Brothers? Justify your recommendations using linear profit modeling.
Part 3
Vino Bella Cellars
Vino Bella Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55–57 °F) and humidity (50–80%) for aging wines. The following table depicts how average cost varies with the number of units manufactured and sold (per month):
Quantity
|
Average Cost
|
1
|
$ 6,000
|
2
|
$ 5,000
|
3
|
$ 4,300
|
4
|
$ 3,850
|
5
|
$ 3,550
|
6
|
$ 3,550
|
7
|
$ 3,657
|
8
|
$ 3,925
|
9
|
$ 4,300
|
10
|
$ 4,800
|
In a1- to 2-pagedocument, address the following:
- What is the defined difference between average cost and marginal cost?
- Vino Bella Cellars sells the units for $4,500 each. This price does not vary with the number of units sold. How many units should Vino Bella Cellars manufacture and sell each month?
- Should Vino Bella Cellars charge more for different quantities of units? Why or why not?
- What recommendation would you make to the owners to increase their profits on this product? Explain the role of linear profit modeling within your recommendation.