Question

Mr. Puffin received a special order request from one of his best customers, Mrs. Penguin. She loves pumpkin muffins and wants to know if Mr. Puffin could make her 100 pumpkin muffins for her party this Saturday. Mr. Puffin decides he could make these muffins before the shop opened on Saturday morning. Mr. Puffin will have an UberEats driver deliver his muffins to the party, which will cost him $1 per mile. Mrs. Penguin’s party is 15 miles away from the shop. No sales commissions will be incurred. Below is information related to a pumpkin muffin.

Selling price per muffin	$9.50
Ingredients cost per muffin	$3.33
Labor cost per muffin	$0.83
Sales commissions per muffin	$0.30
Fixed costs for the month	$11,000

1. What are the relevant costs for this decision?
2. Should Mr. Puffin accept the order?
3. Since Mrs. Penguin is a good customer, could Mr. Puffin charge her less than the standard selling price for pumpkin muffins? If so, what is the minimum price acceptable to Mr. Puffin?

Answer 1

Answer :

(1) Relevant cost for the decision

Relevant cost	100 muffin
Ingredients cost ( $ 3.33*100)	$ 333
Labor cost ( $ 0.83*100)	$ 83
Delivery cost ( $ 1*15)	$ 15
Total relevant cost	$ 431

Note -1

Fixed cost is not relevant for decision because it is unavoidable cost. whether special order accepted or not it will be incurred.

(2)  

Revenue ( $ 9.50*100)	$ 950
Less - Relevant cost	$ 431
Incremental profit	$ 519

Mr. Puffin Should accept the order since Incremental profit is $ 519.

(3) Yes Puffin can charge her less than the standard selling price for pumpkin muffins because it will not effect sales to external customer.

minimum price acceptable to Mr. Puffin

= Total relevant cost

= $ 431