Pop-In Burgers owns numerous restaurants and food production facilities.

QUESTION

Pop-In Burgers owns numerous restaurants and food production
facilities. The company routinely
evaluates proposals to drive operational efficiency. Four such proposals are currently under
review. One entails the suggestion to
close the unprofitable store in Canyon City.
Another is to outsource the acquisition of onions, rather than growing
them. Another proposal is to sell
packaged beef to a non-competing restaurant chain under a private label. The final proposal is to scrap packaging
material that is printed with an old logo.
Michelle Euray is controller for Pop-In Burgers and is reviewing
staff-prepared reports for each proposal.
The reports are summarized as follows:

Canyon City Proposal: The
Canyon City store should be closed.
The company is a consistent money loser. Below is an income report for the Canyon
City store for the past year. Half of
the fixed expenses relate to facilities rent under a 20-year non-cancelable
lease. The lease costs cannot be
avoided, and the location is not able to be subleased to another user.

Sales
$ 1,400,000

Variable expenses

1,000,000

Contribution margin
$ 400,000

Fixed expenses

650,000

Income (loss)
$ (250,000)

Outsource Onions Proposal:
The company spent a total of $2,000,000 producing onions during the
past year. The onions were grown on a
company-owned farm. A vender has
offered to supply a similar quantity and grade of onions for $2,200,000. Staff recommends continuing to grow onions
because the proposed purchase price is 10% higher than the cost of growing
onions. Staff believes it is
inappropriate to consider that the onion farm could be leased to another
farmer for $350,000, if it is diverted from onion production.

Sell Packaged Beef Proposal:
The other company has offered to buy packaged beef at $4 per
pound. The packing plant is well below
full capacity and can accommodate the request without incurring any
additional fixed costs. However, staff
believes it would be inappropriate to price the beef below its own internal
cost of $4.50 per pound, which consists of raw materials ($2.50), direct
labor ($0.75), variable factory overhead ($0.25), and fixed factory overhead
($1.00). This transaction would result
in no material amount of added selling, general, or administrative costs.

Scrap
Packaging Material Proposal: The
company spent $500,000 on packaging material that is imprinted with an old
logo. It is unlikely this material
will ever be used. However, staff
recommends against scraping because this will result in an immediate charge
against net income. It costs only
$2,000 per year to store the material.

Assume
the role of Michelle Euray, and critique each staff prepared analysis.

Canyon
City Proposal:

Outsource Onions Proposal:

Sell Packaged Beef Proposal:

Scrap Packaging Material Proposal:

ANSWER

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