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Question 1 (11 points] The following information pertains to Ford Food Service for the first two quarters of a year. Ford Food Service First Quarter...
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Question 1 (11 points]
The following information pertains to Ford Food Service for the first two quarters of a year.
Ford Food Service
First Quarter Second Quarter
Sales at $5.20 per meal
$46,800
$72,800
Total costs
72,000
90.000
Income (loss)
($25,200)
($17,200)
Each dollar of variable costs comprises 50 percent direct labor, 30 percent direct materials and 20 percent
variable overhead costs. Ford expects sales units, price per unit, variable cost per unit and total fixed costs
to remain at the same level in the third quarter as during the second quarter. Ford sold 14,000 meals in the
second quarter.
Required
a (3 points) What is the break-even point in meals (units) in a quarter?
b. (3 points) The company just received a special order from a government agency that provides meals
for senior citizens for 12,000 meals at a price of $4.70 per meal in the third quarter. If the company
accepts the order, it will not affect the regular market for 14,000 meals in the third quarter. Moreover,
if the company accepts the order, direct labor costs per meal will increase by 10 percent for all meals
produced because of the need to hire and use new labor, and fixed costs will increase by $5,000 in the
quarter. Should it accept the government order?
c. (3 points) Suppose the company believes that such orders from government agencies can become part
of routine business. It expects that for every four meals it sells to its regular (ie., existing) customer
base at $5.20 per meal, it can sell two meals to government agencies at $4.70 per meal. The company
expects that this sales mix will remain steady. As in part b, if the company makes both types of meals,
direct labor costs per meal will increase by 10 percent for all meals produced, and the fixed costs will
increase by $5,000 per quarter. How many total meals will the company have to make and sell in a
quarter in order to break even in this case? How many of these meals will represent sales to regular
customers? In your opinion, will the company lose or benefit from adding this new line of business?
d.
(2 points) This part is unrelated to parts a-c, above. Referring to our discussion in class, we discussed
two broad approaches to break-even analysis in setting with multiple products. The first approach is
to first allocate the common fixed costs to individual products on some basis and then conduct break-
even analysis on a product-by-product basis. The second approach is to assume a certain "product
mix" and compute the break-even point without having to allocate common fixed costs. Which
method is theoretically more appealing, and why?

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Subject: Business, Finance

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