Grammy Girl Products (GGP)has two divisions,Bones and Biscuits,both of which usually have independence in sourcing and pricing decisions.There is an unlimited supply of raw bones.Biscuits manufactures,amongst other items,a specialty product called BisBone.The BisBone formula requires 70% bone meal and 30% cereal per pound,plus a dollop of meat flavoring.BisBone is usually sold in 20-pound cases and processed bones in 5-pound packs.Cost and sales pricing data appears below. $\begin{array}{c} \begin{array}{lll} \ \text {Sales price, per case (pack)}\ \text {Raw bones, per pound}\ \text {Bone meal, per pound (external seller)}\ \text {Cereals, per pound}\ \text {Meat flavoring, per case}\ \text {Processing, per pound}\ \text {Packaging, per case (pack)}\ \text {Overhead per case (nack), 40 \% fixed} \end{array} \begin{array}{lll} \text {BisBone}\ \$ 100.00\ \ \$ 3.00 \ \$ 0.50 \ \$ 3.00 \ \$ 1.00 \ \$ 1.25 \ \$ 10.00 \end{array} \begin{array}{lll} \text {Bone:}\ \$20.00\ \$1.50\ \ \ \ \$0.80\ \$0.75\ \$7.00 \end{array} \end{array}$ In lieu of its normal processing,Bones sometimes grinds raw bones into bone meal (grinding costs $0.05 per pound)When bone meal is sold to Biscuits,bulk packaging is used which costs $1 per 100 pound sack;when sold to other firms,it is packed in 50-pound containers,costing $3 each.Bones prices the container product at $180.Biscuits just received an order for 800 cases of one of its specialty products,BisBone,and is contemplating purchasing bone meal from its sister division. Should Biscuits buy bone meal from Bones at the price of $3.55 per pound? A)Yes,because it is $0.55 per pound cheaper than its external supplier's B)No,because it is $0.55 per pound more costly than its external supplier's C)Yes,because it is $0.025 per pound cheaper than its external supplier's D)No,because it is $0.60 per pound more costly than its external supplier's E)None of the choices are correct

Question

Quizplus · Accepted Answer

To determine the cost of producing one pound of BisBone, we need to calculate the cost of the raw materials per pound of BisBone. 
For 70% bone meal and 30% cereals per pound of BisBone, the cost of raw materials is: 
(0.7 x $3.00) + (0.3 x $0.50) = $2.35 per pound of BisBone. 
Adding the cost of meat flavoring, processing, packaging, and overhead per pound, we get: 
$2.35 + $1.00 + $1.25 + ($10.00/20) + ($0.40/20) = $5.90 per pound of BisBone.

If Biscuits buys bone meal from its sister division, the cost will be $3.55 per pound. Therefore, the total cost of producing one pound of BisBone will be: 
$3.55 + $1.00 + $1.25 + ($10.00/20) + ($0.40/20) = $6.20 per pound of BisBone.

If Biscuits buys bone meal from its external supplier, the cost will be $4.10 per pound. Therefore, the total cost of producing one pound of BisBone will be: 
$4.10 + $1.00 + $1.25 + ($10.00/20) + ($0.40/20) = $6.85 per pound of BisBone.

Comparing the two options, buying bone meal from the external supplier would be cheaper by $0.65 per pound of BisBone. Therefore, Biscuits should not buy bone meal from Bones at the given price of $3.55 per pound. The correct answer is option B.

Grammy Girl Products (GGP)has Two Divisions,Bones and Biscuits,both of Which