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(Solution Download) The Big Apple Pizza Company, a manufacturer and distributor of frozen food products, is introducing


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Big Apple Pizza Company, a manufacturer and distributor of

 

frozen food products, is introducing a new frozen Chicago-style

 

pizza. The new sauce for this pizza is a unique, special recipe and

 

it resulted in very positive taste test ratings in market research

 

studies. The supply manager is trying to decide if the company

 

should make or buy this sauce. The current forecast is for 115,000

 

total gallons of the sauce to be used over the estimated three-year

 

life of the product. The first year, 27,000 gallons are forecast

 

with 44,000 gallons each in years two and three.

 

 

        Currently, Big Apple

 

purchases all of the sauce used in its products, ready-made, from a

 

single source, Top Tomato. The supplierA????1s production plant is

 

located 320 miles from Big AppleA????1s production plant, and weekly

 

truckload deliveries are currently used. The company buys

 

approximately 600,000 gallons of sauce per year from Top Tomato.

 

The sauce supplier has provided high quality, low-cost standard

 

pizza sauces to Big Apple and other pizza makers for over five

 

years. The current sauce supplier has quoted a delivered price of

 

$3.45/gallon for the sauce if a three-year contract is used.

 

Conformance to quality standards for Top TomatoA????1s sauce has been 99

 

percent and on-time delivery has been 95 percent.

 

 

        Big AppleA????1s

 

manufacturing manager has stated that a facility and sauce-making

 

equipment are needed at an investment of $51,000 because the

 

company does not make any sauces. The manufacturing manager stated

 

that he had been considering laying off several workers because of

 

lower demand for frozen pot pies, so he was in favor of making the

 

sauce. The following direct costs have been estimated for making

 

the sauce. Typically, overhead costs for Big AppleA????1s production

 

facility are allocated to products at a rate of 120 percent of

 

direct labor.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Direct labor

 

 

$ 1.05/gallon

 

 

  Direct materials

 

 

$ 2.00/gallon

 

 

 

 

 

 

 

 

 

b.Complete the table given below

 

to calculate the total operating cost for year 1, year 2 and year

 

3.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

Year 1

 

 

Year 2

 

 

Year 3

 

 

  Cost to buy

 

 

  Forecast (gallons/year)

 

 

27,000

 

 

44,000

 

 

44,000

 

 

  Total price ($3.45/gallon)

 

 

  Cost to make

 

 

  Direct labor ($1.05/gallon)

 

 

  

 

 

  Direct materials ($2.00/gallon)

 

 

   

 

 

  Total direct costs

 

 

  Equipment depreciation

 

 

17,000

 

 

17,000

 

 

17,000

 

 

  Other overhead costs

 

 

  

 

 

  Total operations cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c.Based on the total cost for each

 

option computed in Part b), should Big Apple make or buy the

 

sauce?

 

 

 

 

 

 

 

 

 

 

 

 

Make
Buy

 

 

 

  

 

 

  

 

 

 


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