4. Bubbling Beverages Co. produces a soft drink that they sell to the local fast

Question

4. Bubbling Beverages Co. produces a soft drink that they sell to the local fast-food restaurants. The drink is popular among the locals, and recently caught the attention of Taco Bell. This company wants to sign a contract with Bubbling to supply their stores around the country Bubbling's factory has the capacity to produce 100,000 gallons of soft-drink concentrate every year, but they are only currently producing 40,000 gallons. Taco Bell wants Bubbling to increase production by an additional 60,000 gallons, in order to meet their stores' demand. Taco Bell is willing to pay $2.50 per gallon. This contract with Taco Bell is within Bubbling's production capacity. Local customers pay $4.50 per gallon for the drink. To produce one gallon of soft drink, Bubbling has to pay $0.50 for direct materials, and about $0.40 for direct labor. Overhead is allocated at a rate of $1.00 per gallon for variable overhead, and $2.00 per gallon for fixed overhead What would be the net differential gain or loss on this contract with Taco Bell?

Explanation / Answer

Calculate net differential gain or loss :

Net differential gain on this contract with taco bell is $36000

Incremental revenue (60000*2.5) 150000 Incremental cost Direct material (60000*.50) -30000 Direct labour (60000*.40) -24000 Variable overhead (60000*1) -60000 Total incremental cost -114000 Incremental gain (loss) 36000

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