Question

Assume that MTA Sandwiches sells sandwiches for $3.55 each. The cost of each sandwich follows:

Materials	$	1.10
Labor		0.40
Variable overhead		0.20
Fixed overhead ($23,500 per month, 18,800 units per month)		1.25
Total cost per sandwich	$	2.95

One of MTA's regular customers asked the company to fill a special order of sandwiches at a selling price of $2.30 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 $2.95 per sandwich and has asked for your advice.

Required:

a. Prepare a schedule to show the impact on MTA's profits of providing 400 sandwiches in addition to the regular production and sales of 18,800 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)	Statement of revenue
	(Sale of 18800 units)
	Particulars			Amount
	Revenue from sales	(18800*3.55)		$ 66,740.00
	Less-Cost
	Materials	(1.1*18800)		$ 20,680.00
	Labor	(0.4*18800)		$    7,520.00
	Variable overhead	(0.2*18800)		$    3,760.00
	Contribution			$ 34,780.00
	Less- Fixed Cost			$ 23,500.00
		Net Benefit		$ 11,280.00
	Statement of revenue
	(Sale of 19200 units)Offer price 2.3
	Particulars			Amount
	Revenue from sales	(18800*3.55)+(400*2.3)		$ 67,660.00
	Less-Cost
	Materials	(1.1*19200)		$ 21,120.00
	Labor	(0.4*19200)		$    7,680.00
	Variable overhead	(0.2*19200)		$    3,840.00
	Contribution			$ 35,020.00
	Less- Fixed Cost			$ 23,500.00
		Net Benefit		$ 11,520.00
	Conclusion
	There is an additional benefit of 240 Dallors so the order of 400 items should be accepted.
	Notes
	1.    Fixed cost will be same in both the situations and only variable cost will increase as the production increases
	2.    Revenue from sale of 19200 items is calculated in two parts,18800 its sold at the rate of 3.55 and 400 items sold at the rate of 2.3 which is the offer rate.
B)	Lowest price at which offer can be filled
	The profit will not change if offer is accepted at a price which is equal to cost of a sandwich
	Refer the statement of revenue given below when Offer price is 1.7
	Statement of Lowest price
	Materials	$                                         1.10
	Labor	$                                         0.40
	Variable overhead	$                                         0.20
	Lowest price	$                                         1.70
	Statement of Revenue
	(Sale of 19200 units) Offer Price 1.7
	Particulars			Amount
	Revenue from sales	(18800*3.55)+(400*1.7)		$ 67,420.00
	Less-Cost
	Materials	(1.1*19200)		$ 21,120.00
	Labor	(0.4*19200)		$    7,680.00
	Variable overhead	(0.2*19200)		$    3,840.00
	Contribution			$ 34,780.00
	Less- Fixed Cost			$ 23,500.00
		Net Benefit		$ 11,280.00