Lemonade Stand Problem

Case Facts:

You own a sophisticated Lemonade stand. You started it in front of your house as a
child, and it has grown into a large business with a dedicated building and
lemonade-making machine. You are excited that this business made $80,000 in net
income last year. Here are the key facts:

You make two products: Yellow Lemonade and Pink Lemonade. You sell Yellow for
$35/case. You sell Pink for $40/case. Last year, you sold 5,000 cases of Pink Lemonade
and 10,000 cases of Yellow Lemonade.

Direct costs per case are:

Pink Yellow

Labor $20.00 $10.00

Materials $10.00 $17.50

Your annual rent is $30,000. Your annual costs for equipment are $15,000 (It is a
$150,000 piece of machinery that you purchased which has a 10-year expected life).

It takes twice as long to make a case of Pink Lemonade as it does to make a case of
Yellow Lemonade, both in terms of direct labor and machine time.

Last year, you were told that the machines and the building were both operating at full
capacity. Assume that no changes in prices, costs or capacity will take place in the
coming year.

Questions:

You have just completed your “mini MBA,” and now want to determine the answers to a
few questions. Your first question is about profits by product line. Your accountant took a
course in cost accounting and said that you need to account for the indirect costs, so he
suggested that you should take the indirect costs and divide them by the number of
cases produced. The indirect cost that he derived by that method is $3/case.

They are:

1. How do you assess the overall profitability of each product?

2. What product mix optimizes profits for your company?
3. Are there any questions not addressed on this page that you would you want
to know more about when evaluating this problem?