Question:
Airways Catering prepares dinner for several airlines, and sales average 500,000 dinners per month. The cost of each dinner is made up principally of the cost of meat, vegetables, and plastic trays and utensils. Airways attempts to keep its costs low, while still maintaining quality, by using ingredients that are in plentiful supply. The company prepares dinners in batches of 500. The following data are shown in the company's accounting records for February 2005:
Cost of meat for 500 dinners $375
Cost of vegetables for 500 dinners $25
Cost of plastic trays and utensils for 500 dinners $100
Direct labor for 500 dinners $500
Overhead charges total $900,000 per month; these are considered fully fixed for purposes of cost estimation.
Required:
(a) What is the cost per dinner based on average sales and February prices?
(b) If sales increase to 600,000 dinners per month, what will be the cost per dinner (assuming costs remain at February levels)?
(c) Assume that sales are 600,000 dinners per month. If Airways does not want the total cost per dinner to exceed its current level, what amount can the company pay for meat, assuming all other costs remain at February levels?
(d) If sales rise to 600,000 dinners per month, the cost of meat increases to $500 per batch, and the cost of plastic supplies rises to $0.22 per dinner, what amount can Airways pay for vegetables and still keep prices below $4.00 per dinner?
(e) Airways' competitor, Regal Foods, has bid a price of $6.80 per dinner to the airlines. The profit margin in the industry is 100% of total cost. If Airways is to retain the airlines' business, how many dinners must the company produce each period to reach the bid price of Regal Foods? Assume February prices will not change and dinners must be produced in batches of 500.