Question: The pizza parlor manager, Joe, purchases $100 rack to hold small bag of peanuts. The bag costs 24c, Joe will sell it for 40c. If he sells 50 bags a week, it will take him 12 1/2 weeks to cover the cost of bag. After that Joe thinks he will have clear profit of 16c a bag.
Cost-allocation experts tell Joe that this rack is costing him $2,278 overhead because peanuts must be integrated into the entire operation and be allocated for their appropriate share of business overhead. Peanuts must share a proportion of expenditures for rent, light, equipment depreciation, salaries for cook and waitresses.
The counter where the rack is located contains 60 square feet, and counter business grosses $60,000 a year. A square foot that the rack is occupying is worth $1000 a year. If Joe removes the rack, he will add $2,278 of annual overhead to the rest of his operation.
How can you help Joe solve his problem?