Question

QUIZ #4

Exercise 4-36 (Algo) Special Orders (LO 4-1,2) Maria's Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. The following is her forecasted income statement for April, when she expects to produce and sell 2,800 meals: Amount Per Unit Sales revenue $ 16,240 $ 5.80 Costs of meals produced 12,320 4.40 Gross profit $ 3,920 $ 1.40 Administrative costs 2,240 0.80 Operating profit $ 1,680 $ 0.60 Fixed costs included in this income statement are $4,144 for meal production and $560 for administrative costs. Maria has received a special request from an organization sponsoring a picnic to raise funds for the Special Olympics. This organization is willing to pay $3.40 per meal for 300 meals on April 10. Maria has sufficient idle capacity to fill this special order. These meals will incur all of the variable costs of meals produced, but variable administrative costs and total fixed costs will not be affected. Required: a. What impact would accepting this special order have on operating profit? (Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

А B I E F Answer Firstly we have to calculate the variable cost for cost of meal = (total cost of meal-fixed cost ) / No. of meals = (12320-4144)/2800 = $ 2.92 - Change in net operating income due to offer = Offer units * (offer price - variable cost per meal) ) = 300*(3.4-2.92) 1 = $ 144 3 Thus the net inocme increase by $ 144 5 The correct answer operating profit will increase by $144