The standard price per pound is the price that Benji's has paid for cheese for the last few months. Benji's normally uses about 2,000 pounds of mozzarella each month. In the past, mozzarella has been purchased 1,000 pounds at a time.
Benji's purchasing agent has been offered a 6% discount on the price per pound, to $2.35, if Benji's will purchase 2,000 pounds at a time.
Required
1. In May, Benji's purchases 2,000 pounds of cheese at once. Compute the direct materials price variance and indicate favorable or unfavorable. NOTE: I am asking for just the PRICE variance.
2. In the past, about 1% of the cheese was thrown out due to spoilage. In May, because of the larger quantity purchased at once, 10% of the cheese spoiled and was thrown out. Did the favorable direct materials price variance that you computed in part (1) reflect a situation that was favorable from the standpoint of the company? Support your answer with computations. (Hint: think about the money lost due to the spoilage, both under the old way [1,000 pounds at a time] or the new way [2,000 pounds at a time].)
3. During May, 1,800 pounds of cheese were used to produce 3,580 pizzas. Compute the May direct materials quantity variance and indicate favorable or unfavorable. NOTE: I am asking for just the QUANTITY variance.
4. What role does spoilage play in your answer to part (3)?