Reference no: EM132507910
Point 1: Quality Pretzels Inc., makes chocolate covered pretzels and other snacks in its Waco plant. It sells its products in five-pound metal containers, which are also manufactured at the Waco plant. In June 2014, the Texas Canister Company approached Sarah Cassidy, the plant manager of Quality pretzels, with an offer to supply the canisters at a price of $1.00 each. Quality Pretzels assigns the following direct costs to canister production corresponding to a volume of 760,000 canisters:
Point 2: In addition, Quality Pretzels assigns variable overhead at $10 per direct labor hour and fixed manufacturing overhead at $45 per direct labor hour. Sarah Cassidy views this decision as a "long term" decision because she expects that her fixed costs will decrease should she decide to accept the offer from Texas Canister Company. Assume that cost is the only consideration in her decision-making process (i.e., dimensions such as quality and delivery reliability are not relevant).
Question 1: Based on the direct labor based product costing system in place, would Cassidy be inclined to accept the order? Show your computations.
Question 2: Never a fan of the direct labor-based system, Cassidy performs her own analysis and determines that only $80,000 of supervisor salaries and $28,000 of machinery depreciation can be avoided from the fixed manufacturing overhead if she buys the canisters from Texas Canister Company. Based on this information, would Cassidy be inclined to accept the order? Show your computations.
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