7. Old Vine Vineyard produces premium wine. Its success in theindustry is due to its quality, although all of its customers, wineshops and specialty grocery stores, are very cost conscious andnegotiate for price cuts on all large orders. Noting that the wineindustry is becoming increasingly competitive, Old Vine is lookingfor a way to meet the challenge. It is negotiating with EasternSeasons, a regional specialty grocery store, to purchase a largeorder of wine. Old Vine is currently producing at under-capacityand would like to keep its production facilities, gaining bettereconomies of scale by increasing production. Eastern Seasons hasagreed to a large order but only at a price of $31 per bottle. Thespecial order can be purchased in one batch with availablecapacity. Old Vine prepared these data:

Next month's operating information (per unit, for 10,000bottles, made in 10 batches of 1,000 each):

Sales Price                                                    $46

Per Unit costs:

Variable manufacturing costs                        16

Batch level costs                     4

Variable marketing costs                   9

Fixed manufacturing costs                  6

Fixed marketing costs                     1

Special order information – order is produced in one batch

Sales units                                2,000

Sales price per bottle                     $31

No variable marketing costs are associated with this order, butOld Vine has spent $2,500 during the past two months trying to getEastern Seasons to purchase the special order.

Required:

A. How much will the special order change Old Vine's totaloperating income?

B. How much would the special order change Old Vine's totaloperating income if Old Vine is operating at full capacity andwould lose the sale of the 2,000 bottles to regular customers?

C. How might the special order fit into Old Vine's competitivestrategy?