Question

Rumba Dance Hall has offered to buy from Muy Bueno Bakery 100 of its chocolate cakes for $25 each. No variable selling costs would need to be paid, but special packaging of $100 will have to be added. Normally, Muy Bueno sells its cakes at $35 each. Its costs per cake are:
materials, $12;
direct labor, $5;
variable factory overhead, $3;
fixed factory overhead, $2; and variable selling costs, $4.
1. How much net differential profit or loss will Muy Bueno make if it accepts this offer?

Answer 1

Answer:

$400

Explanation:

Total Sales Value = No of chocolate cakes × sales price

                             = 100 × 25

                             = 2,500

Total Costs:

= materials + direct labor + variable factory overhead + special packaging

= ($12 × 100) + ($5 × 100) +  ($3 × 100) + 100

= $1200 + 500 + 300 + 100

= $2,100

Profit = Sales value - Total costs

         = 2,500 - $2,100

         = $400

Note: Fixed costs remain fixed thus will not be affected by acceptance of offer

Variable selling costs will be ignored as they will not be incurred as per the question