Old Vine Vineyard Produces Premium Wine

Essay

Old Vine Vineyard produces premium wine. Its success in the industry is due to its quality, although all of its customers, wine shops and specialty grocery stores, are very cost conscious and negotiate for price cuts on all large orders. Noting that the wine industry is becoming increasingly competitive, Old Vine is looking for a way to meet the challenge. It is negotiating with Eastern Seasons, a regional specialty grocery store, to purchase a large order of wine. Old Vine is currently producing at under-capacity and would like to keep its production facilities, gaining better economies of scale by increasing production. Eastern Seasons has agreed to a large order but only at a price of $39 per bottle. The special order can be purchased in one batch with available capacity. Old Vine prepared these data:
Next month's operating information (per unit, for 10,000 bottles, made in 10 batches of 1,000 each): No variable marketing costs are associated with this order, but Old Vine has spent $2,500 during the past two months trying to get Eastern Seasons to purchase the special order.
Required:
1. How much will the special order change Old Vine's total operating income?
2. How much would the special order change Old Vine's total operating income if Old Vine is operating at full capacity and would lose the sale of the 2,000 bottles to regular customers?
3. How might the special order fit into Old Vine's competitive strategy?