Evaluate different scenarios for viability of accepting a special order.

P$16\mathrm{.}1($LO $2),$ AN$$Keanna$$s Kreations just completed its best year, generating income of $$40,000$ from selling decadent wedding cakes and desserts. For a business that is only two years old and run from Keanna$$s own kitchen, this is quite an accomplishment. She has been asked to provide a special$-$event cake for one event per month at the local convention center, but at a reduced price of $$400.$

While this is mostly fantastic news, Keanna realizes that she is already working at maximum capacity. If she commits to these events, she will need to either find additional capacity or reduce her regular wedding cake sales. The following income statement shows Keanna$$s results from last year.

Sales $$210,000$

COGS $120,000$

Gross margin $90,000$

Operating expenses $50,000$

Operating income $$40,000$

Keanna$$s average selling price is $$1,000$ per cake; fixed$-$MOH costs are $$67,500$ and are included in COGS. All other product costs vary based on volume. Average variable operating expenses are $$100$ per cake; remaining operating expenses are fixed. After thinking about it further, she realizes she$$ll avoid the variable operating expenses on the special$-$event cakes.

Required

Consider each part independently.

$1.$ To keep her existing sales volume and take on the new convention center events, Keanna would need to hire additional employees who would $$invade$$ her home while she and her family sleep. Hiring dependable night$-$shift workers would increase her variable product costs per unit by $20\%.$ If she maintains her existing sales and takes on the new events under these circumstances, how much total operating income will she show for next year?

$2.$ To maintain her current sales while also capitalizing on the new event opportunity, Keanna could rent alternative kitchen space for these monthly special orders. Fixed operating costs would increase by $$5,000$ to cover space and equipment leases, as well as an overtime stipend for her shift supervisor. She anticipates the same per$-$unit variable product costs as last year. How much operating income will her business generate next year under this scenario?

$3.$ Keanna would like to take on the special convention center events, but she is not willing to use her home for more than what she is currently using it$,$ and she does not want to rent additional space. This means she will need to cut back on her regular sales by one cake per month for the next year. Given this scenario, what will her operating income be for next year?

$4.$ Which option$($s$)$ should Keanna seriously consider? Why? Do have any other advice for her?