Question

The Delmar Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is currently producing 1,698 gallons of root beer per day, which represents 70% of its manufacturing capacity. The root beer is available to restaurant customers by the mug, in bottles, or packaged in six-packs to take home. The selling price of a gallon of root beer averages $13, and cost accounting records indicate the following manufacturing costs per gallon of root beer

Raw materials	$	2.56
Direct labor		1.67
Variable overhead		1.11
Fixed overhead		2.03
Total absorption cost	$	7.37

In addition to the manufacturing costs just described, Delmar Beverage incurs an average cost of $1.05 per gallon to distribute the root beer to its restaurants.

SaveMore, Inc., a chain of grocery stores, is interested in selling the premium root beer in gallon jugs throughout its stores in the St. Louis area during holiday periods and has offered to purchase root beer from Delmar Beverage at a price of $10.00 per gallon. SaveMore believes it could sell 727 gallons per day. If Delmar Beverage agrees to sell root beer to SaveMore, it estimates the average distribution cost will be $1.52 per gallon.

Identify all the relevant costs that Delmar Beverage should consider in evaluating the special sales order from SaveMore? (Round your answers to 2 decimal places.)

	Per Gallon
Total relevant costs per gallon

. How would Delmar Beverage’s daily operating income be affected by the acceptance of this offer? (Round your answer to 2 decimal places.)

Daily

in operating income

Answer 1

Soluton 1:

Spare capacity available for Delmar = 1698*30%/70% = 727.71 gallon

It means Delmar is having sufficent capacity to meet special order requirement.

Computation of Relevant cost per gallon for special order - Delmar Beverage Co
Particulars	Amount
Raw material	$2.56
Direct labor	$1.67
Variable overhead	$1.11
Distribution cost	$1.52
Total relevant cost per gallon	$6.86

Solution 2:

Income from special order per day = ($10 - $6.86) * 727 = $2,282.78

Hence daily increase in operating income = $2,282.78