Question

Assume that MTA Sandwiches sells sandwiches for $2.85 each. The cost of each sandwich follows:

Materials $ 0.80
Labor 0.40
Variable overhead 0.40
Fixed overhead ($18,400 per month, 18,400 units per month) 1.00
Total cost per sandwich $ 2.60

One of MTA's regular customers asked the company to fill a special order of sandwiches at a selling price of $1.85 each for a fund-raising event sponsored by a social club at the local college. MTA has capacity to fill it without affecting total fixed costs for the month. MTA's general manager was concerned about selling the sandwiches below the cost of $2.60 per sandwich and has asked for your advice.

Required:

a. Prepare a schedule to show the impact on MTA's profits of providing 800 sandwiches in addition to the regular production and sales of 18,400 sandwiches per month. (Select option "higher" or "lower", keeping Status Quo as the base. Select "None" if there is no effect.)

b. Based solely on the data given, what is the lowest price per sandwich at which the special order can be filled without reducing MTA's profits? (Round your answer to 2 decimal places.)

Answer 1

a. profit is lower

b. lowest price $2.29

Explanation:

a. We have to analyze how this especial order affect the profit of the company

Profit = Revenue- Total cost = P(x) =(Px * Q)-(FC + vc*Q)

Regular production profit= $2.85 x 18,400 units -$2.60 x 18,400 units=

Regular production profit=4600

Production with special order= (P1 * Q1)+(P2 * Q2)-(FC + vc*Q)

P2= price of special order

Q2= quantity of special order

Q= Q1 +Q2

Production with special order= (P1 * Q1)+(P2 * Q2)-(FC + vc*Q)= $2.85 x 18,400 units +$1.85 x 800 units - $18,400- $1.60 x 19600=

Production with special order= 51888 +1480- $18,400- 30720

Production with special order= 4.248‬

b.Production with special order= (P1 * Q1)+(P2 * Q2)-(FC + vc*Q) =4600

=51888 +(P2 * 800)- $18,400- 30720 =4600

=(P2 * 800)= 4600- 51888 + $18,400+30720

P2=1.832/800 = 2,29