Question

Bubba's Custom Shrimp Catering uses activity-based costing to determine the cost of its catering events. The firm has two activity cost pools: cooking (activity rate is $500 per catering event) and serving (activity rate is $12 per plate). The firm currently has 25 catering events a year, with an average of 50 plates per event. It also incurs about $400 in direct costs for each event. The firm has four opportunities to improve its processes (listed below in the answer choices). None of these process improvements is expected to affect revenue. Each process improvement costs $2,500.
Which of the following is the MOST profitable process improvement (read the answer choices carefully)?

a. Reduce the number of plates per event by 20%.

b. Reduce serving activity rate by 25%

c. Reduce direct costs per event by 25%

d. Reduce cooking activity rate by 25%

Answer 1

Answer:

The best option would be option d since it provides the least cost and therefor a higher possibility of being the most profitable.

a. Total cost for option a=$37,000

b. Total cost for option b=$36,250

c. Total cost for option c=$33,750

d. Total cost for option d=$30,625

Explanation:

Step 1: Determine the formula total cost

Total cost=direct costs+cooking cost+serving cost+improvement costs

Consider option a

where;

direct costs=$400×25=$10,000

cooking costs=cooking cost per catering event×number of catering events

cooking costs per year=500×25=$12,500

serving cost=serving cost per plate×number of events×number of plates per event

serving cost per plate=$12

number of events=25

number of plates per event=(80/100)×50=40

serving cost=12×25×40=$12,000

Improvement costs=$2,500

replacing;

Total cost=10,000+12,500+12,000+2,500=$37,000

Consider option b

where;

direct costs=$10,000

cooking costs=cooking cost per catering event×number of catering events

cooking costs per year=500×25=$12,500

serving cost=serving cost per plate×number of events×number of plates per event

serving cost per plate=$12×0.75=$9

number of events=25

number of plates per event=50

serving cost=9×25×50=$11,250

Improvement costs=$2,500

replacing;

Total cost=10,000+12,500+11,250+2,500=$36,250

Consider option c

where;

direct costs=$10,000×0.75=$7,500

cooking costs=cooking cost per catering event×number of catering events

cooking costs per year=500×25=$12,500

serving cost=serving cost per plate×number of events×number of plates per event

serving cost per plate=$12×0.75=$9

number of events=25

number of plates per event=50

serving cost=9×25×50=$11,250

Improvement costs=$2,500

replacing;

Total cost=7,500+12,500+11,250+2,500=$33,750

Consider option d

where;

direct costs=$10,000×0.75=$7,500

cooking costs=cooking cost per catering event×number of catering events

cooking costs per year=500×25×0.75=$9,375

serving cost=serving cost per plate×number of events×number of plates per event

serving cost per plate=$12×0.75=$9

number of events=25

number of plates per event=50

serving cost=9×25×50=$11,250

Improvement costs=$2,500

replacing;

Total cost=7,500+9,375+11,250+2,500=$30,625