Relevant costs, special sales order—idle versus full capacity The Loop Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is currently producing 2,400 gallons of root beer per day, which represents 80% of its manufacturing capacity. The root beer is available to restaurant customers by the mug, in bottles, or packaged in six-packs to take home. The selling price of a gallon of root beer averages $12, and cost accounting records indicate the fol¬ lowing manufacturing costs per gallon of root beer:

Rawmaterials.'. $3.60 Directlabor. 1.80 Variableoverhead. 1.20 Fixedoverhead. 3.00 Total absorptioncost. $9.60 In addition to the manufacturing costs just described, Loop Beverage incurs an average cost of $.80 per gallon to distribute the root beer to its restaurants.

SaveRite, Inc., a chain of grocery stores, is interested in selling the premium root beer in gallon jugs throughout its stores in the St. Louis area during holiday periods and has offered to purchase root beer from Loop Beverage at a price of $9 per gallon. SaveRite believes it could sell 300 gallons per day. If Loop Beverage agrees to sell root beer to SaveRite, it estimates the average distribution cost will be $1.00 per gallon.

Required:

a. Identify all the relevant costs that Loop Beverage should consider in evaluating the special sales order from SaveRite.

b. How would Loop Beverage’s daily operating income be affected by the acceptance of this offer?

c. Assume that Loop Beverage is currently producing 3,000 gallons of root beer daily. Repeat requirements a and b.

d. Explain why your answers are different when Loop Beverage is producing 2,400 gallons per day versus 3,000 gallons per day.