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 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

Status Quo 2800 Units 16,240 $ Alternative 3100 units 17,260 $ Difference 1,020 Higher Sales Revenue Variable cost Meals Administrative Contribution Margin Fixed Cost Operating Profit 8,176 1,680 6,384 4,704 1,680 $ $ $ $ $ 9,052 1,680 6,528 4,704 1,824 $ $ $ $ $ 876 Higher none 144 Higher none 144 Higher Working Sales Revenue Meals Administrative Fixed Cost Status Quo 2800 Units given 12320-4144 2240-560 4144+560 Alternative 3100 units (2800 x 5.80) + (300 x 3.40) 3100 x (8176/2800) Will remain same Will remain same Sales revenue for2800 units will be at $5.80 per unit & for 300 units it is $ 3.40 per unit Bifurcate fixed cost from variable cost. Variable meals cost is 8176 for 2800 units, so 8176/2800 = $2.92 per unit. Fixed cost & variable administrative cost remain same.