Special Order Great Oaks Farm grows organic vegetables and sells them to local r

Question

Special Order Great Oaks Farm grows organic vegetables and sells them to local restaurants after processing. The farm's leading product is Salad-in-a-Bag, which is a mixture of organic green salad ingredients prepared and ready to serve. The company sells a large bag to restaurants for $25. It calculates the variable cost per bag at $19 (including S1 for local delivery), and the average total cost per bag is $22. Because the vegetables are perishable and Great Oaks Farm is experiencing a large crop, the farm has extra capac- ity. 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 2,500 bags during the next month for $21 per bag. Delivery to restaurants in the other city will cost the company $0.75 per bag. It can meet most of the order with excess capacity but would sacrifice 400 bags of regular sales to fill this special order. Please assist Great Oaks Farm's management by answering the following questions. Required a. Using differential analysis, what is the impact on profits of accepting this special order? b. What nonquantitative issues should management consider before making a final decision? c. How would the analysis change if the special order were for 2,500 bags per month for the next five years?

Explanation / Answer

Answer 1

Answer 2

Non-quantitative issues:

In case the regular customers of Great Oak Farm comes to knowledge about it selling the same bag to other restaurants at lower rate, sales of the regular customers can be affected adversely.

It has to ensure that the quality of the product is not reduced owing to extra work on hand

Answer 3

During this period Greak Oak Farms is experiencing large crop. This may not be the scenario in next years. So completing order of 2500 bags per month, it needs to sacrifice regular sales

Variable Cost other than delivery Cost          18.00 Delivery Cost for new order            0.75 Total Variable Cost          18.75 Selling Price          21.00 Contribution earned per bag            2.25 Contribution Margin on 2,500 bags          5,625 Contribution Margin Loss on 400 bags          2,400 Net Benefit of accepting special order          3,225

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.