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 2,000 meals: Amount Per UnitSales revenue $10,000 $5.00Costs of meals produced 8,000 4.00Gross profit $2,000 $1.00Administrative costs 1,000 0.50Operating profit $1,000 $0.50Fixed costs included in this income statement are $2,000 for meal production and $400 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 $3.35 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?b. From an operating profit perspective for April, should Maria accept the order?

Answer 1

Answer:

a.

Impact would accepting this special order have on operating profit: Increase by $105;

b. From an operating profit perspective for April, Maria should accept the order.

Explanation:

a.

We have: Total variable cost in Meal production is equal to:

Total meal production cost - Total fixed cost in meal Production = $8,000 - $2,000 = $6,000

=> Variable cost per one meal production = 6,000/2,000 = $3.

As there is no change in Administrative costs given the 300 meals order is received, we have:

Increase cost = Variable cost per one meal production x Unit of meals delivered = 3 x 300 = $900

Increase in revenue = Price per one meal x Unit of meals delivered = 3.35 * 300 = $1,005

=> Increase in operating profit = $1,005 - $900 = $105.

b.

As Maria has sufficient idle capacity to fill this special order and this order brings increase in operating profit, it should be accepted.