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 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:
What impact would accepting this special order have on operating profit?



Status Quo
3,000Units Alternative
3,300 Units
Revenues $ $ $
Variable costs:
Meals
Administrative


Contribution margin $ $ $
Fixed costs


Operating profit $ $ $

Answer 1

Answer:

No impact on operating income

Explanation:

Computation of impact on operating profit in alternative scenario

No of meals prepared                                                                             3,300

Revenues ( 3,000 * $6) + ( 300 * $3.50)                                           $ 19,050

Computation of Variable Costs per unit and total variable costs

Meals ( Total meal cost $13.500 - Fixed $ 4.500)= $ 9,000

Per unit variable costs is $ 9,000/ 3000 meals = $ 3 per meal

Administrative costs per unit $ 2,100 - $ 600 = $ 1,500

Per unit administrative variable costs is $ 1,500/ 3000 = $ 0.50 per meal

Computation of impact on operating profit in alternative scenario

No of meals prepared                                                                             3,300

Revenues ( 3,000 * $6) + ( 300 * $3.50)                                           $ 19,050

Variable costs

Meals  $ 3 * 3,300 meals                                      $ 9,900

Administrative costs $ 0.50 * 3,300                     $ 1,650

Total Variable costs                                                                              $11,550          

Contribution margin                                                                              $ 7,500

Fixed costs

Meal                                                                         $ 4,500

Administrative costs                                                $   600

Total Fixed costs                                                                                    $ 5.100

Operating income - Alternative                                                            $ 2,400

The operating income in the alternative scenario is exactly the same as in the original case.

This is because the variable components of the cost i.e meal production of $ 3 per  unit and administrative costs of $ 0.50 per unit, in aggregate equal to $ 3.50 per unit which is the revenue on the incremental units.,

Answer 2

Units produced and sold: 3000 meals

Revenue:                      $18000

Cost of goods sold:     ($13500)

Gross profit:                  $4500

Administrative Costs:   ($2400)

Operating Profit:           $2400

Sales Revenue - Cost of goods sold - Administration cost = Operating Profit

Units Produced and sold: 3000+300 meals

Revenue:                      $18000+ $3.5*300 = 19050

Cost of goods sold:     ($13500) + (4500) = ($18000)

Gross profit:                  $1050

Administrative Costs:   ($2400)+($600) = ($3000)

Operating Profit:           ($1950)

New operating profit - old operating profit = Change in Operating İncome

-1950-2400 = -$4350

The Operating profit reduced by $4350