Suzy's Soups: Preparing A Production Cost

Suzys Soups Is In The Process Of Preparing A Production Cost Budget F

Suzy's Soups is in the process of preparing a production cost budget for the coming month. Actual costs at the end of the current month were: Production: 25,000 Jars of soup; Ingredient cost (variable): $20,000; Labor cost (variable): $12,000; Depreciation (fixed): $6,000; Other (fixed): $1,000; Total: $39,000.

Using this information, prepare a budget for the coming month. Assume that production will increase to 30,000 jars of soup, reflecting an anticipated sales increase related to a new marketing campaign. Does the budget suggest that additional workers are needed (each worker can work only 40 hours per week)? Suppose the wage rate is $20 per hour. How many additional labor hours are needed for the coming month? What would happen if management did not anticipate the need for additional labor in the coming month? Calculate the actual cost per unit at the end of the current month and the budgeted cost per unit for the coming month. Explain why the cost per unit is expected to decrease. The company is currently producing and selling 325,000 jars of soup annually. The jars sell for $5.00 each. The company is considering lowering the price to $4.60. Suppose this action will increase sales to 375,000 jars. What is the incremental cost associated with producing an extra 50,000 jars of soup? What is the incremental revenue associated with the price reduction of $0.40 per jar? Should Suzy's lower the price of its soup? Use this spreadsheet (Attached).

Paper For Above instruction

Suzy's Soups, a well-established producer of canned soups, is currently in the phase of preparing its monthly production cost budget. The need for a comprehensive and accurate budget arises from the company's plans to increase production from 25,000 to 30,000 jars of soup, driven by a recent marketing campaign aimed at boosting sales. Accurate cost forecasting is essential to ensure efficient resource allocation, cost control, and strategic decision-making. This paper will analyze the current costs, project future costs, evaluate staffing and labor needs, and assess the implications of a proposed price reduction on overall profitability and operational efficiency.

Analysis of Current Costs and Budget Preparation

At the end of the current month, Suzy's Soups reported total costs of $39,000 for production of 25,000 jars. The breakdown includes variable ingredient costs of $20,000 and variable labor costs of $12,000, alongside fixed costs of depreciation and other expenses totaling $7,000. To prepare the budget for the upcoming month with an expected production of 30,000 jars, it is crucial to distinguish between fixed and variable costs.

Variable costs, primarily ingredients and labor, are directly proportional to production volume. The variable ingredient cost per jar is calculated as $20,000 / 25,000 = $0.80 per jar. Likewise, the variable labor cost per jar is $12,000 / 25,000 = $0.48 per jar. Fixed costs, such as depreciation ($6,000) and other fixed expenses ($1,000), total $7,000 and are unaffected by production volume in the short term.

Applying these figures to the projected production of 30,000 jars, the budgeted costs are as follows: variable ingredient costs = $0.80 × 30,000 = $24,000; variable labor costs = $0.48 × 30,000 = $14,400. Fixed costs remain at $7,000, leading to a total budgeted cost of $24,000 + $14,400 + $7,000 = $45,400.

Assessment of Labor Needs and Staffing

Considering labor requirements, the variable labor cost per jar is $0.48, which corresponds to an hourly wage rate of $20 per hour. The total labor hours for the upcoming month are calculated as follows: total labor cost ($14,400) / wage rate ($20/hour) = 720 hours. Since each worker can work 40 hours per week, and assuming a four-week month, each worker can contribute 160 hours. Therefore, the number of workers needed is 720 hours / 160 hours per worker = 4.5 workers, meaning 5 workers are necessary to meet the labor requirements.

If the current staffing level is fewer than five workers, additional personnel are needed. Should management fail to anticipate this requirement, it could result in production delays, missed orders, and customer dissatisfaction, which would negatively impact revenue and company reputation.

Cost Per Unit Analysis and Explanation of Decrease

The actual cost per unit at the end of the current month is determined by dividing total costs by actual production volume: $39,000 / 25,000 jars = $1.56 per jar. For the upcoming month, the budgeted cost per unit is calculated as total projected costs divided by 30,000 jars: $45,400 / 30,000 = approximately $1.51 per jar.

The decrease in cost per unit from $1.56 to $1.51 is primarily attributable to spreading fixed costs over a larger number of units and the proportional nature of variable costs. As production volume increases, the fixed costs (depreciation and other fixed expenses) are allocated across more units, leading to a lower per-unit cost, demonstrating economies of scale.

Impact of Price Reduction and Incremental Cost Analysis

The company currently sells each jar at $5.00 and is contemplating lowering the price to $4.60 to stimulate demand, which is expected to increase sales from 325,000 to 375,000 jars annually. The incremental revenue generated by this price reduction is calculated as: ($5.00 - $4.60) × 50,000 jars = $0.40 × 50,000 = $20,000.

The incremental cost associated with producing these additional 50,000 jars is assessed by calculating the variable costs per jar: ingredient cost $0.80, labor cost $0.48, totaling $1.28 per jar. The total incremental cost for the additional 50,000 jars is $1.28 × 50,000 = $64,000.

Comparing incremental revenue ($20,000) to incremental cost ($64,000) reveals that the pricing strategy would result in a net loss of $44,000 if the price reduction is enacted solely based on these figures. Therefore, unless the price reduction significantly boosts sales volume beyond 375,000 units or leads to other strategic benefits, it is unlikely to be a financially advantageous move.

Conclusion and Strategic Recommendations

Suzy's Soups' future production planning should prioritize understanding the detailed breakdown of costs and their behavior relative to volume to optimize profitability. The analysis indicates that increasing production from 25,000 to 30,000 jars will slightly reduce the per-unit cost, enhancing margins. Adequate staffing must be ensured, with at least five workers required for the increased production, to avoid operational disruptions. Additionally, the proposed price reduction appears to be unprofitable unless it stimulates substantially higher sales or garners strategic advantages such as market share expansion.

In conclusion, strategic decisions like adjusting production volume and pricing should be carefully analyzed for their financial implications, taking into account both variable and fixed costs, market demand elasticity, and long-term business objectives.

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