Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.Data concerning two recent orders appear below: Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ericson wedding cake to just break even?

Question

Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.Data concerning two recent orders appear below:  Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ericson wedding cake to just break even?

Quizplus · Accepted Answer

To calculate the cost of the Ericson wedding cake, we need to determine the total cost of each activity cost pool for this particular order.

For the Size-Related activity cost pool: 
Activity rate = $1.13 per guest 
Number of guests = 200 
Total cost for this activity = $1.13 x 200 = $226

For the Complexity-Related activity cost pool: 
Activity rate = $43.52 per tier 
Number of tiers = 4 
Total cost for this activity = $43.52 x 4 = $174.08

For the Order-Related activity cost pool: 
Activity rate = $61.44 per order 
Number of orders = 1 
Total cost for this activity = $61.44 x 1 = $61.44

Therefore, the total cost of the Ericson wedding cake is: 
Total cake cost = Total Size-Related cost + Total Complexity-Related cost + Total Order-Related cost 
Total cake cost = $226 + $174.08 + $61.44 
Total cake cost = $461.52

This means that the company would need to charge at least $461.52 for the Ericson wedding cake in order to just break even. Therefore, the best choice is D) $320.21, as it is not a high enough price to cover the total cost of making the cake, and therefore would result in a loss for the company.

Meade Nuptial Bakery Makes Very Elaborate Wedding Cakes to Order