Question

Assume a company purchases honeycombs from beekeepers for $2.00 a pound. The honey can be sold in raw form for $3.20 a pound or it can be used to make honey drop candies. Each package of candies contains three-quarters of a pound of honey and can be sold for $4.40. In addition to the cost of the honey, making and selling each container of candies incurs additional variable costs of $1.10 per unit.

The monthly fixed costs associated with making the candies include:

Master candy-maker’s salary $ 4,500
Depreciation of candy-making equipment 400
Salary of salesperson dedicated to this product 2,000
Total fixed costs $ 6,900
The candy-making equipment does not wear out through use and it has no resale value. Assuming the company makes and sells 8,000 containers of candy, what is the financial advantage (disadvantage) of continuing to process raw honey into candies?

Answer 1

The financial advantage of processing raw honey into candies, considering additional costs and fixed costs against sales revenue for 8,000 units of candies, is $7,500 per month.

Step-by-step explanation:

To calculate the financial advantage or disadvantage of processing raw honey into candies, we need to consider the cost and revenue associated with each option. Selling raw honey yields a revenue of $3.20 per pound. In contrast, selling candy that contains three-quarters of a pound of honey at $4.40 per package results in higher raw material costs when accounting for additional variable costs of $1.10 per unit.

First, we calculate the total variable cost of making candies: Cost of honey per package (3/4 pounds at $2.00/pound) is $1.50, plus additional variable costs of $1.10, totaling $2.60 per package. Next, we find the net revenue per package by subtracting the total variable cost from the sales price: $4.40 - $2.60 = $1.80. Lastly, we multiply the net revenue per package by the number of units sold (8,000 units) and then subtract the fixed costs ($6,900) to find the financial advantage.

The calculation goes as follows:

1. Net revenue per candy package: $4.40 (sales price) - $1.50 (honey cost) - $1.10 (additional variable costs) = $1.80.
2. Total net revenue from candies: 8,000 units * $1.80 = $14,400.
3. Financial advantage of candies: $14,400 - $6,900 (fixed costs) = $7,500.

Therefore, the financial advantage of continuing to process raw honey into candies is $7,500 per month.