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 Unit
Sales revenue	$	10,000		$	5.00
Costs of meals produced		8,000			4.00
Gross profit	$	2,000		$	1.00
Administrative costs		1,000			0.50
Operating profit	$	1,000		$	0.50

Fixed 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? (Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

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

	Yes
	No

Answer 1

Part A

	Status Quo (2000 units)	Alternative (2300 units)	Difference
Sales	10000 (2000*5)	11005 (2000*5)+(300*3.35)	1005	higher
Variable costs:
Meal	6000 2000*((8000-2000)/2000)	6900 2300*((8000-2000)/2000)	900	(higher)
Administrative	600 (1000-400)	600 (1000-400)		None
Contribution margin	3400	3505	105	higher
Fixed costs	2400 (2000+400)	2400 (2000+400)		None
Operating profit	1000	1105	105	higher

Part B

Yes, because accepting profits would increase operating profits by 105.