Question Parag Dairy maker of specialty cheeses, produces a soft cheese from the k of dry raised on a special com-based diet One kilogram of Parag soft cheese which has con margin of 38, requires 4 litres of mik A well-known gourmet restaurant has asked Parg Dary o produce 2,000 kilograms of a hard cheese (to be branded Khas Gourmet) from the same ma Knowing that the diary has sufficient unused capacity, Parag Sharma, owner of Pa D caloulates the Particulars Mik (10 litres x $1 50 per itre) Varable direct manufacturing labour coste of making one kilogram of the desired hard cheese Amount (S) 15 5 3 6 29 Variable manufacturing overhead L ixed manufacturing cost allocated Total manufacturing cost Required (a) Suppose Parag Diary can acquire all the special milk that it needs. What is the minim price per kilogram it should charge for the hard cheese? (b) Now suppose that the special milk is in short supply Every kilogram of Khas Gourmet cheese that Parag Diary produces will reduce the quantity of Parag soft cheese that t can make and sell What is now the minimum price per kilogram it should charge to produce hard cheese? (2 3-5 marks)
(a) Minimum price is to be charged=total variable costs=15+5+3=$23 per Kilogram Fixed costs are independent of production volume and hence irrelavant in this situation. (b) Soft cheese requires 4 litres of milk for one kilogram Hard cheese requires 10 litres of milk for one kilogram Hence,one Kilogram of Hard cheese will steal 2.5 Kilogram(10/4) of soft cheese. Contribution foregone on soft cheese=2.5*8=$ 20 Minimum price to be charged: Variable costs 23 Contribution foregone 20 Minimum price to be charged 43 Per Kg
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