Sell-or-Process-Further Decision
P4. Bakers Bagels, Inc., produces and sells 20 types of bagels by the dozen. Bagels are priced at $6.00 per dozen (or $0.50 each) and cost $0.20 per unit to produce. The company is considering further processing the bagels into two products: bagels with cream cheese and bagel sandwiches. It would cost an additional $0.50 per unit to produce bagels with cream cheese, and the new selling price would be $2.50 each. It would cost an additional $1.00 per sandwich to produce bagel sandwiches, and the new selling price would be $3.50 each. Required1. Identify the relevant per-unit costs and revenues for the alternatives. Are there any sunk costs? 2. Based on the information in requirement 1, should Bakers Bagels expand its product offerings? 3. Accounting Connection? Suppose that Bakers Bagels did expand its product line to include bagels with cream cheese and bagel sandwiches. Based on customer feedback, the company determined that it could further process those two products into bagels with cream cheese and fruit and bagel sandwiches with cheese. The company’s accountant compiled the following information: Sales Revenue if Sold without Further Processing Product (per unit) Bagels with cream cheese $2.50 Bagel sandwiches 3.50 Perform an incremental analysis to determine if Bakers Bagels should process its products further. Explain your findings.
1: Incremental contribution margin for bagels with cream cheese: $1.50?
2: Incremental contribution margin for bagel sandwiches: $2.00?
3: Operating income from further processing bagel sandwiches with cheese: $0.50