Question

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 3,000 meals:

	Amount				Per Unit
Sales revenue	$	18,000			$	6.00
Costs of meals produced		13,500				4.50
Gross profit	$	4,500			$	1.50
Administrative costs		2,100				0.70
Operating profit	$	2,400			$	0.80

Fixed costs included in this income statement are $4,500 for meal production and $600 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 $3.50 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 3000 Units	Alternative 3300 Units	Difference
Sales revenue
Variable costs
Meals
Administrative
Contribution margin
Fixed costs
Operating profit

Answer 1

Variable cost of meal production for 3000 meals = Total cost of meals produced - Fixed cost for meal production = 13500 - 4500	9000
Variable cost of meal production per unit = Variable cost of meal production for 3000 meals / 3000 = 9000 / 3000	3

	Status Quo 3000 units	Alternative 3300 units	Difference
Sales revenue	18000	19050	1050	Higher
Costs of meals produced	13500	14400	900	Higher
Gross profit	4500	4650	150	Higher
Administrative costs	2100	2100	0	None
Operating profit	2400	2550	150	Higher