Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 31

Special Orders

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 3,000 meals:

	Amount	Per Unit
Sales revenue	$18,000	$6.00
Costs of meals produced	13,500	4.50
Gross profit	$ 4,500	$1.50
Administrative costs	2,100	0.70
Operating profit	$ 2,400	$0.80

Fixed costs included in this income statement are $4,500 for meal production and $600 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 $3.50 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?

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b. Should Maria accept the order?

Step 1 of 4

a.

If the special order is accepted, only the variable costs of meals produced will be incurred. The fixed costs of meals produced and the variable and fixed administrative costs would not be affected. Therefore, the impact of accepting the special order on the operating profit can be determined by subtracting the total variable cost of meals produced for the special order from the total selling price of the special order.