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Chapter 23: Q8BTN (page 1063)

Restaurants often add and remove menu items. Visit a restaurant and identify a new food item. Make a list of costs that the restaurant must consider when deciding whether to add that new item. Also, make a list of nonfinancial factors that the restaurant must consider when adding that item.

Short Answer

Expert verified

The non-financial factors are the factor that does not include monetary terms.

Step by step solution

01

Definition of the direct cost

The direct cost is the cost that is directly related to the manufacturing of the product.

02

Cost included in adding the new food item

Before adding the new food item, the restaurant must consider the direct and the indirect cost related to the food item. The direct and indirect cost includes the cost of ingredients, cost of labor, cost of labor to serve food, and cost of utensils.

There are also some non-financial factors that the restaurant must consider to adding an item. These factors are the demand for the food item, the culture of the society, needs of the customers.

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Most popular questions from this chapter

Samsung must confront sunk costs. Why are sunk costs irrelevant in deciding whether to sell a product in its present condition or to make it into a new product through additional processing?

José Ruiz wants to start a company that makes snowboards. Competitors sell a similar snowboard for \(240 each. José believes he can produce a snowboard for a total cost of \)200 per unit, and he plans a 25% markup on his total cost. Compute José’s planned selling price. Can José compete with his planned selling price?

Kando Company incurs a \(9 per unit cost for Product A, which it currently manufactures and sells for \)13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for \(5 per unit and sell it for \)12 per unit. If it does so, unit sales would remain unchanged and \(5 of the \)9 per unit costs of Product A would be eliminated. Should the company continue to manufacture Product A or purchase it for resale?

Bert Asiago, a salesperson for Convertco, received an order from a potential new customer for

50,000 units of Convertco’s single product at a price \(25 below its regular selling price of \)65. Asiago knows

that Convertco has the capacity to produce this order without affecting regular sales. He has spoken to

Convertco’s

controller, Bia Morgan, who has informed Asiago that at the \(40 selling price, Convertco will

not be covering its variable costs of \)42 for the product, and she recommends the order not be accepted.

Asiago knows that variable costs include his sales commission of \(4 per unit. If he accepts a \)2 per unit

commission, the sale will produce a contribution margin of zero. Asiago is eager to get the new customer

because he believes that this could lead to the new customer becoming a regular customer.

Required

1. Determine the contribution margin per unit on the order as determined by the controller.

2. Determine the contribution margin per unit on the order as determined by Asiago if he takes the lower

commission.

3. Do you recommend Convertco accept the special order? What factors must management consider?

Alto Company currently produces component TH1 for its sole product. The current cost per unit to manufacture

its required 400,000 units of TH1 follows.

Direct materials and direct labor are 100% variable. Overhead is 75% fixed. An outside supplier has offered

to supply the 400,000 units of TH1 for \(4 per unit.

Direct materials . \)1.20

Direct labor . 1.50

Overhead . 6.00

Total cost per unit . . . . . . . . . . . . $8.70

Required

1. Determine whether management should make or buy the TH1.

2. What factors besides cost must management consider when deciding whether to make or buy TH1?
See all solutions

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