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Perform relevant cost analysis for Healthy Dairy Products

See attached case file.

Answer the following questions. Provide all necessary calculations to support your answers.

1) Why do you think that HDP selected pounds of butterfat as an allocation basis? Would you suggest a different allocation base?

2) Using cost estimates from the existing system presented in table 2, would you accept the McDonald's order? Why?

3) Perform a relevant cost analysis (i.e., determine the incremental cost per gallon) of the McDonald's order. What is the minimum price HDP can charge McDonald's and still increase net income by $.05 per gallon? Make any reasonable assumptions you deem necessary.

4) What is HDP's basic mix strategy? Is the McDonald's order consistent with HDP's strategy? Explain why or why not.

5. What are the consequences of the current allocation procedures? What suggestions, other than implementing activity-based costing (ABC), would you make to Mr. Smith about improving the product costing system used in determining target prices?


Solution Summary

Your tutorial is attached in Excel. Click in cells to see computations. Each question has a paragraph explaining how the allocations impact the pricing and how the contract from McDonald's should be priced given the current allocation methods.