Peterson Company sells motor oil by the case to automobile repair shops and deal

Question

Peterson Company sells motor oil by the case to automobile repair shops and dealerships. Each case of oil costs Peterson $15. The facility costs are $150,000 per period. Each period, Peterson sells approximately 100,000 cases of motor oil at $25 per case. California Classic Cars is requesting an order of 30,000 cases of motor oil in the next period at a price of $20 per case. Since Peterson has no excess capacity, accepting this order means that only 70,000 cases of motor oil can be sold through normal channels. Should Peterson accept this order? No. Peterson would be giving up $150,000 of proft. No. The contribution margin of $5 per case would not cover fixed costs of $150,000 Yes. The contribution margin of $5 per case will cover the fixed costs of $150,000. Yes. All $600,000 of revenue would be proft.

Explanation / Answer

Profit without order: Sales 2500000 =100000*25 Less: Variable expenses 1500000 =100000*15 Contribution margin 1000000 Less: Fixed expenses 150000 Net operating income 850000 Profit with order: Sales 2350000 =(70000*25)+(30000*20) Less: Variable expenses 1500000 =100000*15 Contribution margin 850000 Less: Fixed expenses 150000 Net operating income 700000 Difference in Profits = 700000-850000 = ($150000) The order should not be accepted as profits decrease by $150000 Option 1 is correct

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