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 2,500 meals:

	Amount				Per Unit
Sales revenue	$	13,750			$	5.50
Costs of meals produced		10,625				4.25
Gross profit	$	3,125			$	1.25
Administrative costs		1,250				0.50
Operating profit	$	1,875			$	0.75

Fixed costs included in this income statement are $3,625 for meal production and $500 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 $3.25 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.

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 2,500 units	alternative 2,800 units	differences	higher or lower
sales revenue
variable costs:
meals
administrative
contribution margin
fixed costs
operating profit

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

• Yes

• No

Answer 1

a.

	status quo 2,500 units	alternative 2,800 units	differences	higher or lower
sales revenue	13,750	13,750 + ($3.25 * 300) = 14,725	975	Higher
variable costs:
meals	10,625 - 3,625 = 7,000	7,000 / 2,500 * 2,800 = 7,840	840	Higher
administrative	1,250 - 500 = 750	1,250 - 500 = 750	-	None
contribution margin	6,000	6,135	135	Higher
fixed costs	3,625 + 500 = 4,125	3,625 + 500 = 4,125	-	None
operating profit	1,875	2,010	135	Higher

b. Yes, because operating profit is higher in this alternative.