Question

Company produces and sells

55 comma 00055,000

boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual​ costs:

Cost Item	Total Costs
Variable production costs	$330,000
Fixed production costs	520,000
Variable selling costs	165,000
Fixed selling and administrative costs	160,000
Total costs	$1,175,000

GarrardGarrard

normally charges

$ 21$21

per box. A new distributor has offered to purchase

5 comma 5005,500

boxes at a special price of

$ 17$17

per box.

GarrardGarrard

will incur additional packaging costs of

$ 1$1

per box to complete this order.

Requirements

​(a)	Suppose GarrardGarrard has surplus capacity to produce 5 comma 5005,500 more boxes. What will be the effect on GarrardGarrard​'s income if it accepts this​ order?
​(b)	Suppose that instead of having surplus capacity to produce 5 comma 5005,500 more​boxes, GarrardGarrard has surplus capacity to produce only 1 comma 5001,500 more boxes. What will be the effect on GarrardGarrard​'s income if it accepts the new order for 5 comma 5005,500 ​boxes?

Requirement​ (a) Suppose

GarrardGarrard

has surplus capacity to produce

5 comma 5005,500

more boxes. What will be the effect on

GarrardGarrard​'s

income if it accepts this​ order?

Select the items that are relevant if the order is​ accepted, then calculate the effect on income. ​(Only complete the necessary answer boxes. Use parentheses or a minus sign for a net decrease in​ income.)

	in income

Answer 1

A)

Variable Production cost per box :-

= Variable Production Cost / No. of Box Produces and Sells

= $330000 / 55000

= $6 per Box

Variable Selling cost per box :-

= Variable Selling cost / No. of box Produces and Sells

= $165000 / 55000

= $3 Per Box

Incremental Variable Cost per box :-

= Variable Production Cost + Variable selling Cost + Additional Packaging Cost

= $6 + $3 + $1

= $10

Incremental Variable Cost :-

= No. of Boxes for Special Order * Incremental Variable Cost Per Box

= 5500 * $10

= $55000

Incremental Contribution Margin :-

= Incremental Revenue - Incremental Variable Cost

= (5500*$17) - $55000

= $93500 - $55000

= $38500

B) Effect on income if the capacity of production is Reduced by 1500.

Unused Capacity :-

= Actual Capacity - Production Capacity

= 5500 - 1500

= 4000 Boxes

Opportunity cost per box :-

= Normal Price - (Variable Production Cost + Variable Selling cost per box)

= $21 - ($6 + $3)

= $21 - $9

= $12

Opportunity cost :-

= Unused Capacity * Opportunity cost per box

= 4000 * $12

= $48000

Increase in Incremental Contribution margin :-

= Incremental Contribution Margin - Opportunity Cost

= $38500 - $48000

= ($9500)

If it accepts this order, Garrard will earn Loss of $9500