Benito Co.is a company that manufactures and sells organic fertilizers. They have been offered a contract by a large retail chain to supply 10,000 bags of fertilizer per month at a price of $20 per bag.

The variable cost of producing one bag of fertilizer is $12, which includes direct materials, direct labor, and variable overhead. Fixed overhead costs amount to $50,000 per month, which are fully absorbed by their current production.

Benito Co. is already operating at full capacity, producing 20,000 bags per month and selling them through various small retailers for $25 per bag. To fulfill the new contract, they would have to forego the production and sale of 10,000 bags to the small retailers.

Assume that to fulfill the new contract with the retail chain, Benito Co. would have to invest in a new packing machine. The machine would cost $30,000 and have no salvage value, but it would reduce the variable cost per bag by $1. The machine would last for exactly one year (or 12 contracts).

1. What is the differential cost of accepting the new contract?

2. Should Benito Co. accept the contract? What other factors should they consider in making this decision?

3. How does the investment in the new packing machine change the differential cost of accepting the contract?

4. With the investment in the new packing machine, should Benito Co. now consider accepting the contract?