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:

A. increase by $600
B. decrease by $1,000
C. decrease by $14,000
D. decrease by $11,000

Answer 1

Answer:

Option (B) is correct.

Explanation:

variable manufacturing costs:

= ($294,000 ÷ 14,000) × 1,000

= $21,000

variable selling and administration overhead:

= ($42,000 ÷ 14,000) × 1,000

= $3,000

Gwinnett's profits for the year will:

= Additional sales revenue - Variable costs

= (No. of cases sold additionally × selling price per case) - (variable manufacturing costs + variable selling and administration overhead)

= (1,000 × $23) - ($21,000 + $3,000)

= $23,000 - $24,000

= -($1,000)

So, the contribution is negative and profits decreases by $1,000.