Maurice Tutor
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62.   Alternative concepts of cost (adapted from CMA exam). Kathleen and Mary (KM) operate a small coffee shop. They produce regular coffee available from many other similar busi- nesses and also produce gourmet coffee for special orders. Their accountant prepared the following annual income statement:
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|
 |
Gourmet |
 |
Regular |
 |
Total |
 |
|
Sales  ........................................................................................................ |
$40,000 |
 |
$20,000 |
 |
$60,000 |
 |
|
Coffee Beans.......................................................................................... |
$ 6,000 |
 |
$ 3,000 |
 |
$ 9,000 |
 |
|
Labor  ....................................................................................................... |
10,000 |
 |
4,000 |
 |
14,000 |
 |
|
Depreciation .......................................................................................... |
3,000 |
 |
1,500 |
 |
4,500 |
 |
|
Power....................................................................................................... |
400 |
 |
300 |
 |
700 |
 |
|
Rent  ......................................................................................................... |
6,000 |
 |
4,000 |
 |
10,000 |
 |
|
Heat and Light...................................................................................... |
500 |
 |
150 |
 |
650 |
 |
|
Other........................................................................................................ |
500 |
 |
400 |
 |
900 |
 |
|
Total Costs....................................................................................... |
$26,400 |
 |
$13,350 |
 |
$39,750 |
 |
|
Operating Profit.................................................................................... |
$13,600 |
 |
$ 6,650 |
 |
$20,250 |
 |
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The depreciation charges are for machines used in the respective products. The rent is for the building space, which Kathleen and Mary (KM) have leased for 10 years at $10,000 per year. The accountant apportions the rent and the heat and light to the product lines based on amount of floor space occupied. Material, labor, power, and other costs are variable costs that are directly related to the product causing  them.
A valued customer has asked KM to supply 2,000 cups of gourmet coffee. KM is working at capacity and would have to give up some other business in order to take this business. They must produce special orders already agreed to but could reduce the output of regular orders by about one-half for one year and use the freed machine time normally used for the regular orders to produce the special orders. The customer is willing to pay $3.50 per cup. The coffee beans will cost about $1.50 per cup, and the labor will be $1.00 per cup. KM will have to spend $1,000 for a special coffee machine that they will discard when the job is finished. The special order will also require additional power costing  $250.
a.   Calculate and present the differential cash cost of filling the special order, considering both the cost of the order and the costs saved by reducing work on standard products.
b.   Should KM accept the order? Explain your answer.