Question

Case Study Me-n-U is a very successful hamburger chain located in Florida. One of the main reasons why customers love this burger chain is because of the freshness and the unique taste of the hamburger patties offered by this food establishment. Me-n-U buys its hamburger patties from a special farm called Lux Living Farm located in Vermont. The cows on this farm receive daily massages and are fed beer instead of water. They are also allowed to roam free over 100 acres of land. These factors contribute to the tenderness of the meat. Worried that this farm will sell its beef to another customer, Me-n-U bought the farm so it would have exclusive rights and access to all of the wonderful beef. In the past, Lux Living Farm charged Me-n-U $25 per pound: Variable cost per pound $10 Fixed cost per pound $ 10 Markup 5 Total price = $25

Questions: 1. How should the sale from Lux Living Farm to its parent company, Me-n-U be reported on the consolidated income statement and the stand-alone income statements?

2. What price should be set?

3. Do you agree with the decision in buying the farm? Why or why not? Incorporate managerial accounting concepts such as opportunity costs, sunk cost, and out-of-pocket costs in your answers. Also, think about how your answers will impact non-controlling interest if present.

Answer 1

1. Recording sales from Lux Living Farm to its parent Company i.e. Me-n-U

Here, Lux Living Farm will record the sales made to its parent in its standalone income statements because these sales will definitely affect the profitability of Lux Living Farm.

However, looking at a bigger picture i.e. in case of consolidated income statement these intra group sales will be reduced from the overall sales made by the group because such sales will not affect the overall state of affairs of the whole group. Group here means Lux Living farm And its parent Me-n-U.

2. Price to be set by Lux Living Farm

Here, Varible cost per pound and fixed cost per pound is $10 each and also a mark up of $5, making total price of $25. The minimum price at which Lux Living Farm shouls sell its product should be $20 to atleast cover its cost.