The Founder and CEO of RK Teas Inc, Rik Kassian invites you into their meeting room to look over their accounting numbers and give the company some consulting advice. In the room, are the CEO, VP of Sales, and VP of Operations. You see on the wall that RK Teas's mission is to provide the highest possible quality premium organic tea ingredients and ethical sources for all of their kombucha products.

The VP of Sales says they just got a call from a new liquor store chain called "Plant People'" that wants to buy a large order of the kombucha. Plant People would like to make a special order to buy 2,000 bottles of this premium alcohol kombucha at a low price of $39 per bottle. The VP of sales thinks they can do this order of kombucha can be produced in one batch with the available capacity but wants to know your opinion.

Budgeted operating information for RK Teas month (this is based on 10,000 units/month, and a normal batch size of 1,000 bottles):

RK Teas Regular Sales Information

Regular selling price per bottle of Kombucha $55.00

RK Teas Variable costs per unit (bottle of Kombucha):

RK Teas Variable manufacturing cost : $22.00

RK Teas Batch-level cost (per batch - regardless of batch size) (= $5 per bottle (given) 1,000 bottles per batch (given)) : $5,000

Plant People: Special Order Details:

Plant People Order: Selling price per unit (bottle) : $39.00

Plant People Order: Number of units : 2,000

Plant People Order: Number of batches (Given) : 1

Plant People Batch-level costs per unit = $2.50 = $5,000 per batch / 2,000 units per batch

1. a/ What will be the change in RK Tea's total operating income if they accept Plant People order?

1. b/ What would be the change in RK Tea's total operating income if RK Tea's was operating at full capacity and, if it accepted the order from Plant People? Do you think they would lose the sale of 2,000 bottles to the regular clients? (The Vp of Operations says to assume sales lost to normal clients would be produced in 2 batches of 1,000 bottles, while the special order that you see abovecan be produced in a single batch of 2,000 bottles.)

2. The executives ask you whether this order from Plant People will work with RK Tea's competitive strategy in the short, medium and long term? What are the pros and cons of accepting this order and if they don't accept it? What cost accounting strategy do you recommend they use to deal with competitive

pressures from suppliers and buyers of their product?