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. If this special order is accepted, Gwinnett's profits for the year will:

Question

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. If this special order is accepted, Gwinnett's profits for the year will:

Quizplus · Accepted Answer

Gwinnett's regular selling price per case is $30, but the special order requires selling at $15 per case. Therefore, Gwinnett will lose $15 per case if it accepts the special order. The total loss would be $15 x 1,000 cases = $15,000. Thus, Gwinnett's profits for the year will decrease by $15,000. However, Gwinnett's variable and fixed costs will remain the same even with this special order. Therefore, the total decrease in profit will be $15,000 minus the current profit of $9,000, which equals $6,000. Therefore, the profits will decrease by $1,000 ($6,000 - $5,000), so option B is correct.

Gwinnett Barbecue Sauce Corporation Manufactures a Specialty Barbecue Sauce