Question

Maria's Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. Here is her forecasted income statement for April, when she expects to produce and sell 2,300 meals: Sales revenue Costs of meals produced Gross profit Administrative costs Operating profit Amount $ 12,190 9,545 $ 2,645 1,150 $ 1,495 Per Unit $ 5.30 4.15 $ 1.15 0.50 $ 0.65 Fixed costs included in this income statement are $2,645 for meal production and $460 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 $3.15 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.) Status Quo 2,300 Units $ 12,190 Alternative 2,600 Units Difference Sales revenue Variable costs: Meals Administrative Contribution margin Fixed costs Operating profit : LLL $ 1,495

Answer 1

Status Quo 2300 Units 12,190 Alternative 2600 units 13,135 Difference 945 Higher $ $ Sales Revenue Variable cost Meals Administrative Contribution Margin Fixed Cost Operating Profit 6,900 $ 690 $ 4,600 $ 3,105 $ 1,495 $ 7,800 690 4,645 3,105 1,540 $ $ $ $ $ 900 Higher none 45 Higher - none 45 Higher Working Sales Revenue Meals Administrative Fixed Cost Status Quo 2300 Units given 9545 - 2645 1150 - 460 2645 +460 Alternative 2600 units (2300 x 5.30) + (300 x 3.15) 2600 X (6900/2300) Will remain same Will remain same Sales revenue for2300 units will be at $5.30 per unit & for 300 units it is $ 3.15 per unit Variable meals cost is 6900 for 2300 units, so 6900/2300 = $ 3 per unit. Fixed cost & variable administrative cost remain same. Less Sales Revenue Variable cost Contribution Margin Fixed Cost Operating Profit Status Quo 126,600 102,180 24,420 17,700 6,720 Alternative Drop Strawberry Difference $ 84,300 $ $ 64,110 $ $ 20,190 $ $ 15,045 $ $ 5,145 $ 42,300 38,070 4,230 2,655 1,575 Less Working Sales Revenue Variable cost Fixed Cost Status Quo 33300+42300+51000 23310+38070+40800 4300+6000+7400 Alternative Drop Strawberry 33300+51000 23310+40800 17700 - (15% of 17700)