Questions:
(ABC; pricing) Clare's Super Cake Company makes very elaborate wed-ding cakes to order. The company's owner, Clare Cole, has provided the following data concerning the activity rates in its activity-based costing system:
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Activity Cost Pools
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Activity Rate
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Guest related
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$0.90 per guest
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Tier related
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$34.41 per tier
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Order related
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$150.00 per order
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The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of cake tiers. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately. The average wedding has 125 guests and generally requires a three-tiered cake.
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Sacks Wedding
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Gemmel Wedding
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Number of reception guests
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50
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164
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Number of tiers on the cake
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1
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5
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Cost of purchased decorations for cake
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$22.50
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$58.86
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a. What amount would the company have to charge for the Sacks wedding cake to break even on that cake?
b. Assuming that the company charges $650 for the Gemmel wedding cake, what would be the overall gross margin on the order?
c. Letitia White wants to order a special cake for her 25th wedding anniversary celebration. She wants the cake to be four tiers but, in addition, would like 20 special flowers added to the top of the cake, which requires very intricate detailing instead of purchased decorations. White expects that attendance at the anniversary party will be 200 people. If Cole decides to charge $5 for each special flower, which price should she quote? What price should be charged if the company wants to make an overall gross margin of 35 percent on the White order?
d. Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes for receptions with more than the average number of guests and for receptions with fewer than the average number of guests? Explain your answer.