Question

Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 12,000 cases of sauce each year but is currently only manufacturing and selling 10,800. The following costs relate to annual operations at 10,800 cases:

	Total Cost
Variable manufacturing cost	$129,600
Fixed manufacturing cost	$49,000
Variable selling and administrative cost	$32,400
Fixed selling and administrative cost	$31,000

Gwinnett normally sells its sauce for $35 per case. A local school district is interested in purchasing Gwinnett's excess capacity of 1,200 cases of sauce but only if they can get the sauce for $14 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:

decrease by $7,200

increase by $600

decrease by $10,800

decrease by $1,200

Answer 1

Answer: decrease by $1,200.

Sales revenue (1200 x $14)		16800
Less: Variable costs
Variable manufacturing cost ($129600 x 1200/10800)	14400
Variable selling and administrative cost	3600
($32400 x 1200/10800)
Total variable costs		18000
Net income (loss) from special order $		-1200

The fixed manufacturing cost and fixed selling and administrative cost is ignored since the same are not affected by the special order.