Mile-High Foods, Inc., was formed in March 2011 to provide prepackaged snack boxes for

| July 1, 2019

Mile-High Foods, Inc., was formed in March 2011 to provide prepackaged snack boxes for anew low cost regional airline beginning on April 1. The company has just leased warehousespace central to the two airports to store materials. To move packaged materials from thewarehouses to the airports, where final assembly will take place, Mile-High must choosewhether to lease a delivery truck and pay a full-time driver at a fixed cost of $5,000 per month,or pay a delivery service a rate equivalent to $0.40 per box. This cost will be included in eitherfixed manufacturing overhead or variable manufacturing overhead, depending on which optionis chosen. The company is hoping for rapid growth, as sales forecasts for the new airline arepromising. However, it is essential that Mile-High managers carefully control costs in order to becompliant with their sales contract and remain profitable. Ron Spencer, the company’spresident, is trying to determine whether to use absorption, variable, or throughput costing toevaluate the performance of company managers. For absorption costing, he intends to use thepractical-capacity level of the facility, which is 20,000 boxes per month. Production-volumevariances will be written off to cost of goods sold.Costs for the three months are expected to remain unchanged. The costs and revenues forApril, May, and June are expected to be as follows:Sales revenue $6.00 per boxDirect material cost $1.20 per boxDirect manufacturing labor cost $0.35 per boxVariable manufacturing overhead cost $0.15 per boxVariable delivery cost (if this option is chosen) $0.40 per boxFixed delivery cost (if this option is chosen) $5,000 per monthFixed manufacturing overhead costs $15,000 per monthFixed administrative costs $28,000 per monthProjected production and sales for each month follow. High production in May is the result of ananticipated surge in June employee vacations.April/May/June sale (units) 12,000/12,500/13,000April/May/June Production 12,200/18,000/9,000Required1. Compute operating income for April, May, and June under absorption costing, assuming thatMile-High opts to usea. the leased truck and salaried driver.b. the variable delivery service.2. Compute operating income for April, May, and June under variable costing, assuming thatMile-High opts to usea. the leased truck and salaried driver.b. the variable delivery service.3. Compute operating income for April, May, and June under throughput costing, assuming thatMile-High opts to usea. the leased truck and salaried driver.b. the variable delivery service.4. Should Mile-High choose absorption, variable, or throughput costing for evaluating theperformance of managers? Why? What advantages and disadvantages might there be inadopting throughput costing?5. Should Mile-High opt for the leased truck and salaried driver or the variable delivery service?Explainbriefly.

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