Sweet Cocoa Produces Chocolate Syrup Used by Candy Companies

question 41

Multiple Choice

Sweet Cocoa produces chocolate syrup used by candy companies.Recently, the company has had excess capacity due to a foreign supplier entering its market.Sweet Cocoa is currently bidding on a potential order from Kilwin's Candy for 5,000 cases of syrup.The estimated cost of each case is $27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50.The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs.The largest fixed cost relates to depreciation of plant and equipment.Should Sweet Cocoa bid on the Kilwin's Candy business at $21 per case?

• A)No, because the incremental loss will be $6.50 per case
• B)Yes, because the incremental profit will be $1.00 per case
• C)No, because there are too many qualitative considerations
• D)Yes, because the incremental profit will be $10 per case

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Definitions:

Generates Revenues

The process by which businesses engage in activities that result in the inflow of cash or other assets from delivering goods or services.