Answered Essay: Maria's Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. Here is her fore

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 3,900 meals:

Amount Per Unit

Sales revenue $ 26,910 $ 6.90

Costs of meals produced 19,305 4.95

Gross profit $ 7,605 $ 1.95

Administrative costs 3,120 0.80

Operating profit $ 4,485 $ 1.15

Fixed costs included in this income statement are $7,605 for meal production and $780 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 $3.95 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?

Status Quo 3,900 Units Alternative 4,200 Units Difference
Sales revenue $26,910
Variable costs:
Meals
Administrative
Contribution margin
Fixed costs
Operating profit

Expert Answer

 

3900 units 4200 units Diff
Sales revenue $                                     26,910 $26,910 + ($3.95*300) = $28,095 $ 1,185
Variable cost
Meals $19,305-$7,605 = $11,700 $11,700/3,900*4,200 = $12,600 $     900
Administrative $3,120-$780 = $2,340 $3,120-$780 = $2,340 $           –
Contribution margin $                                     12,870 $                                                   13,155 $     285
Fixed costs $7,605+$780 = $8,385 $7,605+$780 = $8,385 $           –
Operating profit $                                       4,485 $                                                     4,770 $     285
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