60.1K

Verified Solution

Link Copied!

Full Belly Farm grows organic vegetables and sells them to distributors and local restaurants after processing. Assume the farm$$s leading product for restaurant customers is a mixture of organic green salad ingredients prepared and ready to serve. The company sells a large bag to restaurants for $$30.$ It calculates the variable cost per bag at $$20($including $$1$ for local delivery$),$ and the average total cost per bag is $$24.$ Growing conditions have been very good this season and Full Belly has extra capacity.

A representative of a restaurant association in another city has offered to buy fresh salad stock from the company to augment its regular supply during an upcoming international festival. The restaurant association wants to buy $3,000$ bags during the next month for $$22$ per bag. Delivery to restaurants in the other city will cost the company $$0\mathrm{.}75$ per bag. It can meet most of the order with excess capacity but would sacrifice $200$ bags of regular sales to fill this special order. Please assist Full Belly Farm$$s management by answering the following questions.

Required

a$.$ Using differential analysis, what is the impact on profits of accepting this special order?

Short$-$term impact on profits from the special order:

b$.$ Should management consider nonquantitative issues before making a final decision?

c$.$ How would the analysis change if the special order were for $3,000$ bags per month for the next five years? $($Assume there would be no loss of regular sales and consider only quantitative factors.$)$

Monthly long$-$term impact on profits from the special order:

Answer & Explanation Solved by verified expert

See Answer