Citrus Berry Limited manufactures a range of jams and marmalades which it sells under its own brand name in supermarkets throughout Ireland. The company has been in operation for twenty years and is currently operating at 80% of its full manufacturing capacity. One of its top selling products is Seville marmalade with Champagne. Recently, Barati, a low-cost supermarket chain, approached Citrus Berry Limited and asked if it would be interested in supplying this Seville marmalade and allow it to be sold under the Barati brand in its supermarkets as part of a one-off, three month promotion. To supply all of its supermarkets during the three-month promotion, Barati requires50,000 jars of Seville marmalade per month and has offered to pay Citrus Berry Limited €0.85 per jar. The following information, relating to the production of one jar of Seville marmalade with Champagne, is available:
Citrus Berry Limited manufactures a range of jams and marmalades which it sells under its own brand name in supermarkets throughout Ireland. The company has been in operation for twenty years and is currently operating at 80% of its full manufacturing capacity. One of its top selling products is Seville marmalade with Champagne. Recently, Barati, a low-cost supermarket chain, approached Citrus Berry Limited and asked if it would be interested in supplying this Seville marmalade and allow it to be sold under the Barati brand in its supermarkets as part of a one-off, three month promotion. To supply all of its supermarkets during the three-month promotion, Barati requires50,000 jars of Seville marmalade per month and has offered to pay Citrus Berry Limited €0.85 per jar. The following information, relating to the production of one jar of Seville marmalade with Champagne, is available:
Chapter1: Financial Statements And Business Decisions
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Citrus Berry Limited manufactures a range of jams and marmalades which it sells
under its own brand name in supermarkets throughout Ireland. The company has
been in operation for twenty years and is currently operating at 80% of its full
manufacturing capacity. One of its top selling products is Seville marmalade with
Champagne. Recently, Barati, a low-cost supermarket chain, approached Citrus Berry
Limited and asked if it would be interested in supplying this Seville marmalade and
allow it to be sold under the Barati brand in its supermarkets as part of a one-off, three
month promotion. To supply all of its supermarkets during the three-month promotion,
Barati requires50,000 jars of Seville marmalade per month and has offered to pay Citrus
Berry Limited €0.85 per jar. The following information, relating to the production of one
jar of Seville marmalade with Champagne, is available:
1. Each jar of Seville marmalade requires 0.125 kg of Seville oranges. Citrus Berry
Limited purchases Sevilleoranges in bulk at a price of €1.60 per kg.
2.
To manufacture a jar of Seville marmalade 0.250 kg of sugar is required and the
company purchases sugarfor €0.32 per kg from its regular suppliers.
3. Citrus Berry Limited adds 0.015 litres of Champagne to each jar of Seville
marmalade. It purchases Champagne directly from a French chateau for €5.25
per 0.75 litre bottle.
4. The marmalade is sold in glass jars which Citrus Berry Limited purchases from
its suppliers in batches of 100,000 for €24,000. These jars are in constant use in
the manufacture of a variety of Citrus Berry products.
5. Citrus Berry Limited applies fixed production overheads to products based on
machine hours. Budgeted fixed production overheads allocated to Seville
marmalade with Champagne for the year amount to €45,000 and the company
expects that in total 100,000 machine hours will be spent manufacturing this
marmalade. The production team in Citrus Berry Limited calculated that on
average each jar of marmalade requires a total of six minutes of machine time.
Variable manufacturing overheads have been calculated at €0.08 perjar.
6.
Each jar of marmalade supplied must have a Barati label. The labels cost €5,000
for a batch of 500,000 and if not used for this contract they would be scrapped.
7. Another jam manufacturer has offered Citrus Berry Limited €10,000 per month to
lease machinery that would be required to produce the marmalade for Barati.
Required:
(a)
Based on the information provided above, recommend whether Citrus Berry
Limited should accept the contract to produce Seville marmalade with
Champagne for the low-cost supermarket chain. You should provide
calculations to support your recommendation.
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