A Local Bakery Is Suddenly Inundated with Many More Orders

question 64

Multiple Choice

A local bakery is suddenly inundated with many more orders for wedding cakes than it has the physical capacity to make. Rather than turn away customers, the owner decides to rent another kitchen across town to fulfill all of the orders. But she needs to borrow money to pay for the rent and additional workers, the additional cost of which will be paid by the profits from the additional cakes. Which of the following ratios will be most affected by this decision?

• A) the bakery's short-term solvency ratio
• B) the bakery's long-term solvency ratio
• C) the bakery's profitability ratio
• D) the bakery's activity ratio
• E) the bakery's equity ratio

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Definitions:

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate estimated manufacturing overhead costs to products on the basis of a chosen activity base.

Direct Labor-Hour

A unit measuring the time workers who are directly involved in the production process spend on creating a unit of product.

Underapplied Overhead

A situation where the allocated overhead cost is less than the actual overhead incurred, leading to insufficient cost recovery.

Direct Labor-Hours

The total hours of labor directly involved in producing goods or delivering services.