HST Ltd manufactures French fries from Russet potatoes. These are sold to local restaurants. The company manufactures French fries using a single production line that runs eight hours per day. The potatoes are purchased and stored in suitable warehouses from which they are distributed on a first-in first-out (FFO) basis. The production of French fries involves a number of processes. They are: cleaning, sorting, peeling, manual inspection, cutting, machine inspection, blanching, drying, frying, draining, freezing, and packaging (Beijing Time Progress Development Co. Ltd 2002). When they are packed they are moved to the cold storage area of the warehouse. In order to ensure that sufficient finished goods are in stock the potatoes purchased in any month is equal to the current period’s sale plus 25 per cent of the following month’s sale. Sales commission is paid at a rate of 8% on sales. This is paid in the following month.
HST’s goal is to breakeven every month. The company is currently selling more than enough 10lb bags of French fries to do this. Expansion may be necessary to meet the needs of customers. However, at this point there is no major demand French fries made from Russet potatoes. The company is planning to purchase another machine to produce French fries made from Idaho potatoes. This is necessary as the larger food chains prefer that brand. The demand for HST’s product would be greater and sales would be steadier. The months in which demand was higher are months in which Idaho potatoes were scarce.
The following table shows the calculation of the variable cost of French fries, the relevant mark-up and the selling price per unit
Calculation: Variable cost per 10lbs of French fries
Direct material cost
| | |Quantity |unit price ($) |Cost ($) |Total | |Potato (lbs) | |12 |0.1 |1.2 | | |Vegetable oil (gallons) | |0.1 |2 |0.2 |1.4 | | | | | | | | |Direct labor | |0.03 |8 |0.24 |0.24 | |Total direct costs | | | | |1.64 | | | | | | | | |Manufacturing overheads | | | | | | |Utilities | | | |0.1 | | |indirect materials | | | |0.05 | | |indirect labor | | | |0.2 |0.35 | | | | | | | | |Operating expenses | | | | | | |Sales commission | | | |0.08 | | |Transportation cost | | | |0.07 |0.15 | |Total variable cost per 10lb French fries | | |2.14 | | | | | | ...
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