Managerial Accounting

Variable and fixed costs, profitability of order, opportunity cost Healthy Hearth specializes in lunches for health-conscious people. The company produces a small selection of lunch offerings each day. The menu selections may vary from day to day, but Healthy Hearth charges the same price per menu selection because it adjusts the portion sizes according to the cost of producing the selection. Healthy Hearth currently sells 5,000 meals per month. Variable costs are $3 per meal, and fixed costs total $5,000 per month. A government agency has recently proposed that Healthy Hearth provide 1,000 meals next month for senior citizens at $3.50 per meal. Volunteers will deliver the meals to the senior citizens at no charge.

(a) Suppose Healthy Hearth has sufficient idle capacity to accommodate the government order for next month. What will be the impact on Healthy Hearth’s operating income if it accepts this order?

(b) Suppose that Healthy Hearth would have to give up regular sales of 500 meals, at a price of $4.50 each, to accommodate the government order for next month. What will be the impact on Healthy Hearth’s operating income if it accepts the government order?

SOLUTION

(a)

Healthy Hearth has sufficient excess capacity to handle the one-time (short-run) order for 1,000 meals next month. Consequently, the analysis focuses on incremental revenues and costs associated with the order:

|Incremental revenue per meal |$3.50 |

|Incremental cost per meal |3.00 |

|Incremental contribution margin per meal |$0.50 |

|Number of meals |× 1,000 |

|Increase in contribution margin and operating income |$ 500 |

Healthy Hearth will be better off by $500 with this one-time order. Note that total fixed...