Question - Short-run pricing, capacity constraints. Ohio Acres Dairy, maker of specialty cheeses, produces a soft cheese from the milk of Holstein cows raised on a special corn-based diet. One kilogram of soft cheese, which has a contribution margin of $8, requires 4 liters of milk. A well-known gourmet restaurant has asked Ohio Acres to produce 2,000 kilograms of a hard cheese from the same milk of Holstein cows. Knowing that the dairy has sufficient unused capacity, Elise Princiotti, owner of Ohio Acres, calculates the costs of making one kilogram of the desired hard cheese:
Milk (10 liters × $1.50 per liter) - $15
Variable direct manufacturing labor - 4
Variable manufacturing overhead - 2
Fixed manufacturing cost allocated - 5
Total manufacturing cost - $26
1. Suppose Ohio Acres can acquire all the Holstein milk that it needs. What is the minimum price per kilogram the company should charge for the hard cheese?
2. Now suppose that the Holstein milk is in short supply. Every kilogram of hard cheese Ohio Acres produces will reduce the quantity of soft cheese that it can make and sell. What is the minimum price per kilogram the company should charge to produce the hard cheese?