Fit Drink Co. produces a sports drink that they sell to the local retailers in their suburban community. The drink is popular among the local athletes, and recently caught the attention of a major gym chain headquartered nearby. This company wants to sign a contract with Fit Drink to supply their gyms around the country.
Fit Drink's factory has the capacity to produce 200,000 gallons of sports drink concentrate every year, but they are currently producing only 100,000 gallons. The gym chain wants to contract with Fit Drink to produce 150,000 gallons for their stores, and is willing to pay $7.50 per gallon. Fit Drink does not have the capacity to expand its facilities, and would have to terminate some current contracts to meet a special order.
Local customers pay $10 per gallon for the drink. To produce one gallon of sports drink, Fit Drink has to pay $1.50 for direct materials, and about $1.30 for direct labor. Overhead is allocated at a rate of $1.50 per gallon for variable overhead, and $1.75 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Question

Fit Drink Co. produces a sports drink that they sell to the local retailers in their suburban community. The drink is popular among the local athletes, and recently caught the attention of a major gym chain headquartered nearby. This company wants to sign a contract with Fit Drink to supply their gyms around the country. 
Fit Drink's factory has the capacity to produce 200,000 gallons of sports drink concentrate every year, but they are currently producing only 100,000 gallons. The gym chain wants to contract with Fit Drink to produce 150,000 gallons for their stores, and is willing to pay $7.50 per gallon. Fit Drink does not have the capacity to expand its facilities, and would have to terminate some current contracts to meet a special order.
Local customers pay $10 per gallon for the drink. To produce one gallon of sports drink, Fit Drink has to pay $1.50 for direct materials, and about $1.30 for direct labor. Overhead is allocated at a rate of $1.50 per gallon for variable overhead, and $1.75 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?

Quizplus · Accepted Answer

The Answer of Fit Drink Co. produces a sports drink that they sell to the local retailers in their suburban community. The drink is popular among the local athletes, and recently caught the attention of a major gym chain headquartered nearby. This company wants to sign a contract with Fit Drink to supply their gyms around the country. 
Fit Drink's factory has the capacity to produce 200,000 gallons of sports drink concentrate every year, but they are currently producing only 100,000 gallons. The gym chain wants to contract with Fit Drink to produce 150,000 gallons for their stores, and is willing to pay $7.50 per gallon. Fit Drink does not have the capacity to expand its facilities, and would have to terminate some current contracts to meet a special order.
Local customers pay $10 per gallon for the drink. To produce one gallon of sports drink, Fit Drink has to pay $1.50 for direct materials, and about $1.30 for direct labor. Overhead is allocated at a rate of $1.50 per gallon for variable overhead, and $1.75 per gallon for fixed overhead.
What would be the differential gain or loss on this contract?