Question

Bert's Burritos sells a burrito and a soda combo for $5.00; variable costs are $3.10. Bert plans to sell 5,000 burrito/soda combos for the year and has fixed costs of $1.20 per combo. Babson Field Hockey team needs 30 burrito/soda combos for a team meeting but can only pay $4.00 per combo. The order from Babson Field Hockey team will not impact Bert's current planned sales. If Bert accepts the offer, Bert's profit will:

A. Decrease by $9

B. Increase by $27

C. Increase by $120

D. Stays the same.

Answer 1

The correct answer is b) increase by $ 27

Explanation and calculation

In the given question Bert's burritos has received special offer at $4 per combo from hockey team for $ 4. As this offer doesn't impact regular sales so we have calculate the relevant cost for the offer. The relevant cost will be $ 3.1 that is variable cost. Fixed cost is not relevant as it has already been incurred, so it is sunk cost

So net impact of offer

=no. Of units *(Offer price - relevant cost)

= 30 (4-3.1)

= $ 27 increase in profit

Thus the correct answer is b) increase in profit.