Fizzy Drinks Co. produces a soft drink that they sell to the local fast-food restaurants in their rural community. The drink is popular among the locals, and recently caught the attention of a major restaurant chain headquartered nearby. This company wants to sign a contract with Fizzy Drinks to supply their stores around the country.
Fizzy Drinks' factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000. The restaurant chains wants to contract with Fizzy Drinks to produce 60,000 gallons for their stores, and is willing to pay $5.00 per gallon. Fizzy Drinks does not have the capacity to expand their facilities.
Local customers pay $9.00 per gallon for the drink. To produce one gallon of soft drink, Fizzy Drinks has to pay $1.00 for direct materials, and about $0.80 for direct labor. Overhead is allocated at a rate of $2.00 per gallon for variable overhead, and $4.00 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Question

Fizzy Drinks Co. produces a soft drink that they sell to the local fast-food restaurants in their rural community. The drink is popular among the locals, and recently caught the attention of a major restaurant chain headquartered nearby. This company wants to sign a contract with Fizzy Drinks to supply their stores around the country. 
Fizzy Drinks' factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000. The restaurant chains wants to contract with Fizzy Drinks to produce 60,000 gallons for their stores, and is willing to pay $5.00 per gallon. Fizzy Drinks does not have the capacity to expand their facilities.
Local customers pay $9.00 per gallon for the drink. To produce one gallon of soft drink, Fizzy Drinks has to pay $1.00 for direct materials, and about $0.80 for direct labor. Overhead is allocated at a rate of $2.00 per gallon for variable overhead, and $4.00 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Quizplus · Accepted Answer

The Answer of Fizzy Drinks Co. produces a soft drink that they sell to the local fast-food restaurants in their rural community. The drink is popular among the locals, and recently caught the attention of a major restaurant chain headquartered nearby. This company wants to sign a contract with Fizzy Drinks to supply their stores around the country. 
Fizzy Drinks' factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000. The restaurant chains wants to contract with Fizzy Drinks to produce 60,000 gallons for their stores, and is willing to pay $5.00 per gallon. Fizzy Drinks does not have the capacity to expand their facilities.
Local customers pay $9.00 per gallon for the drink. To produce one gallon of soft drink, Fizzy Drinks has to pay $1.00 for direct materials, and about $0.80 for direct labor. Overhead is allocated at a rate of $2.00 per gallon for variable overhead, and $4.00 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?