Question

Special Order

Great Oaks Farm grows organic vegetables and sells them to local restaurants after processing. The farm’s leading product is Salad-in-a-Bag, which is a mixture of organic green salad ingredients prepared and ready to serve. The company sells a large bag to restaurants for $25. It calculates the variable cost per bag at $19 (including $1 for local delivery), and the average total cost per bag is $22. Because the vegetables are perishable and Great Oaks Farm is experiencing a large crop, the farm has extra capac- ity. A representative of a restaurant association in another city has offered to buy fresh salad stock from the company to augment its regular supply during an upcoming international festival. The restaurant association wants to buy 2,500 bags during the next month for $21 per bag. Delivery to restaurants in the other city will cost the company $0.75 per bag. It can meet most of the order with excess capacity but would sacrifice 400 bags of regular sales to fill this special order. Please assist Great Oaks Farm’s management by answering the following questions.

Required

a. Using differential analysis, what is the impact on profits of accepting this special order?

b. What nonquantitative issues should management consider before making a final decision?

c. How would the analysis change if the special order were for 2,500 bags per month for the next five years?

Please use an Excel Spreadsheet. Thank you!

Answer 1