Question

Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 15,000 cases of sauce each year but is currently only manufacturing and selling 14,000. The following costs relate to annual operations at 14,000 cases: Total Cost Variable manufacturing cost $294,000 Fixed manufacturing cost $56,000 Variable selling and administrative cost $42,000 Fixed selling and administrative cost $38,000 Gwinnett normally sells its sauce for $45 per case. A local school district is interested in purchasing Gwinnett's excess capacity of 1,000 cases of sauce but only if they can get the sauce for $23 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett's profits for the year will:

Answer 1

Effect on income= $1,000 decrease

Step-by-step explanation:

Giving the following information:

Unitary variable costs:

Variable manufacturing cost= $294,000/14,000= $21

Variable selling and administrative= $42,000/14,000= $3

Special offer= 1,000 units for $23

Because it is a special offer and there is unused capacity, we will not take into account the fixed costs:

Effect on income= 1,000*(23 - 24)= $1,000 decrease

Answer 2

Gwinnett's profits for the year will decrease by $1,000

Step-by-step explanation:

total costs for normal 14,000 cases:

• Variable manufacturing cost $294,000 / 14,000 = $21 per case
• Fixed manufacturing cost $56,000
• Variable selling and administrative cost $42,000
• Fixed selling and administrative cost $38,000
• total = $430,000

the incremental revenue of selling 1,000 cases to the school district = $23 x 1,000 = $23,000

the incremental costs for producing and selling 1,000 more cases:

• variable manufacturing costs = $21 x 1,000 = $21,000
• variable S&A costs = $3 x 1,000 = $3,000
• total incremental costs = $24,000

incremental revenue - total incremental costs = $23,000 - $24,000 = -$1,000