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Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 10,000 cases of sauce each year but is currently only manufacturing and selling 9,000. The following costs relate to annual operations at 9,000 cases: Gwinnett normally sells its sauce for $30 per case. A local school district is interested in purchasing Gwinnett’s excess capacity of 1,000 cases of sauce but only if they can get the sauce for $15 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. Should Gwinnett accept this special order? Show your calculation!
Expert Answer
| Total Units = 9000 | ||
| Total | Per Unit | |
| Sales (9000 Cases * $ 30) –A | 270000 | 30 |
| Less : Variable Cost | ||
| Variable Manufacturing Cost | 126000 | 14 |
| Variable Selling and Administration Expeses | 18000 | 2 |
| Total Variable Cost — B | 144000 | 16 |
| Contribution Margin C = (A-B) | 126000 | 14 |
| Less : Fixed Cost | ||
| Fixed Manufacturing Overhead | 45000 | |
| Fixed Selling Expeses | 27000 | |
| Total Fixed Cost –D | 72000 | |
| Net Operating Loss E = C-D | 54000 | |
| The Company should recover the Variable Cost for the Additional Order received. | ||
| Therefore the Company should minimum fix the price for Additional unit $ 16 | ||
| Here the Company got the Additional order for 1000 units. In that case the minimum seling price will be 16(i.e.the per unit Variable Cost) | ||
| So, here offered price is $ 15, hence the order will not be accepted by the Company. | ||
| It Order is accepted, loss on additional unit sold wil be ($ 16 -$ 15) * 1000 = $ 1000 | ||
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