Question

# Maria's Food Service provides meals that nonprofit organizations distribute to handicapped and elderly people. The following...

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

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.

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