Profitability of orders and opportunity cost Dawson Company produces and sells 80,000 boxes of specialty foods each

Question:

Profitability of orders and opportunity cost Dawson Company produces and sells 80,000 boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual costs:

COST ITEM TOTAL COSTS

Variable production costs............. $400,000

Fixed production costs.............. 480,000

Variable selling costs................ 320,000

Fixed selling and administrative costs........ 200,000

Total costs................... $1,400,000

Dawson normally charges $25 per box. A new distributor has offered to purchase 8,000 boxes at a special price of $22 per box. Dawson will incur additional packaging costs of $1 per box to complete this order.

Required

(a) Suppose Dawson has surplus capacity to produce 8,000 more boxes. What will be the effect on Dawson’s income if it accepts this order?

(b) Suppose that instead of having surplus capacity to produce 8,000 more boxes, Dawson has surplus capacity to produce only 3,000 more boxes. What will be the effect on Dawson’s income if it accepts the new order for 8,000 boxes?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...