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Fruit First produces and sells baskets of dried fruit for $20 each. It receives a special order from Carol Costellano for 150 fruit baskets at a special price of $16. The company incurs a variable cost of $11 and a fixed manufacturing overhead of $6 per unit of fruit basket. The company is operating at full capacity and will have to cancel its existing orders to fill this special order. What will be the total opportunity cost that must be considered in the incremental analysis for this decision?

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lucic

Answer:

$600

Explanation:

Normal selling price for baskets of dried fruits = $20

No. of baskets ordered = 150

At this price, the total selling revenue will be =$20*150 =$3000

Variable cost = $11*150 =$1650

Manufacturing overhead cost = $6*150 =$900

Income at a selling price of $20 = $3000-$(1650+900)=$450

For the special order

Selling price= $20

Total selling revenue =$16*150=$2400

Income at a selling price of $16 = $2400-$2550 = -$150 loss

The opportunity cost of this decision will be leaving a profit of $450 and obtaining a loss of $150

Total opportunity cost that must be considered in the incremental analysis for this decision =$450 +$150 =$600

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