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Barbara Karloff Inc With Respect to Direct Materials, Which Is True for the Manufacture

question 28

Multiple Choice

Barbara Karloff Inc. recently set up as a microbrewery to manufacture a variety of beers, ales and stouts to customer specifications. The standard sizes per batch are as follows: stout, 5,000 gallons; ale, 8,000 gallons; and beer, 10,000 gallons. A beer batch takes six days to process, ale ten days and stout 14 days, the difference primarily attributable to the number of steps in the brewing process and the amount of time needed to mature the brew to the intended flavor specifications. By tradition, a new batch is started at 7 a.m., the start of a work day. It costs $1,800 in labor and variable overheads to set up each batch. The brewery's monthly fixed overheads are $220,000, which is allocated to products based on gallons. Other costing data appears below. $\begin{array} { | l | r | r | r | } \hline \text { Per gallon of output } & \text { Beer } & \text { Ale } & \text { Stout } \\\hline \text { Basic direct materials } & \$ 0.40 & \$ 0.60 & \$ 0.90 \\\hline \begin{array} { l } \text { Variable conversion } \\\text { costs }\end{array} & \$ 0.80 & \$ 1.00 & \$ 1.20 \\\hline & \text { Bottle } & \text { Label } & \text { Case/Crate/Pack } \\\hline \text { Other direct materials } & \$ 0.05 & \$ 0.03 & \$ 0.25 \\\hline\end{array}$ With respect to direct materials, which is true for the first month of operations?

Definitions:

Profit Maximization

The process or strategy of adjusting production and operation inputs to achieve the highest possible profit.

Short-Run Marginal Costs

The cost to produce one additional unit of a good or service in the short run, where at least one input is fixed.

Market Price

The present cost at which a good or service can be purchased or sold in the market.

Profit-Maximizing Firm

A company that chooses its level of output and pricing strategy to achieve the highest possible profit based on its costs and the market demand.