Question

A major health food chain has approached Fruit plc to ask if the company would be willing to provide 50,000 bars in the forthcoming year at a price of 80p per bar. The company will only accept 50,000 bars. Assume that the company has finalised production and sales plans for the year at a price of 90p and a volume of 180,000 bars. The maximum capacity Fruit plc can produce in a year is 200,000 bars. The variable cost of producing the bars is 50p

Based purely on the profit or loss from accepting the order, Fruit plc should agree to sell the 50,000 bars at 80p to the chain.  

True or False?

Answer 1

Fruit plc has a total capacity to produce 200,000 bars. It has finalised the production and sales plans for the year at a price of 90p and a volume of 180,000 bars. Thus, it has spare capacity to produce 20,000 bars.

Further, Fruit plc will have to forego the external demand of 30,000 bars to fulfil this order.

The order that it has received from a major health food chain is for 50,000 bars @ 80p.

The variable cost of producing one bar is 50p.

Thus, per unit contribution due to the offer is 30p (80p - 50p)

Now, the benefit/loss to Fruit plc due to the order can be computed as follows:

Particulars	Amount
Contribution earned by Fruit plc upon sale of 50,000 bars @30p	1,500,000p
Less: Contribution lost due to external demand foregone of 30,000 units	1,200,000p
@40p per bar (90p-50p)
Additional benefit if the order is fulfilled	300,000p

Since the order is resulting in additional benefit of 300,000p, Fruit plc should agree to sell the 50,000 bars at 80p to the chain.