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Horngren'S Financial And Managerial Accounting
Found in: Page 1409

Short Answer

Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of $9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:

Cocoa powder $14,500

Chocolate syrup 103,000

Boxed assorted chocolates 204,000

The cost of transforming the cocoa powder into chocolate syrup would be $72,000. Likewise, the company would incur a cost of $183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.

The president’s decision of making boxed assorted chocolates is wrong.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Financial Analysis

Financial analysis refers to a technique used by business entities to determine the benefits of choosing a particular item amongst the available alternatives. Such an analysis considers the cost and revenue associated with a particular set of data.

Step 2: Preparation of financial analysis

Particulars

Chocolate syrup

Boxed assorted chocolate

Processed sales revenue

$103,000

$204,000

Less: Sales revenue of cocoa powder

($14,500)

($14,500)

Revenue generated

$88,500

$189,500

Less: Processing cost

($72,000)

($183,000)

Income

$16,500

$6,500

Step 3: Comment on the president’s decision  

According to the financial analysis shown above, the decision made by the president to make boxed assorted chocolates is not correct.

If the president wants to maximize profits, then he should shift his focus to chocolate syrup instead of boxed assorted chocolates.

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