Question

P26-1B Kobe Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2013, the company reported the following operating results while operating at 90% of plant capacity. Amount Per Unit Sales $4,500,000 $50.00 Cost of goods sold 3,150,000 35.00 Selling and administrative expenses 360,000 4.00 Net income $ 990,000 $11.00 Fixed costs for the period were: Cost of goods sold $900,000, and selling and administrative expenses $135,000. In July, normally a slack manufacturing month. Kobe receives a special order for 9,000 basketballs at $32 each from the European Basketball Association (EBA). Acceptance of the order would increase variable selling and administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Kobe Inc. accept the special order? (c) What is the minimum selling price on the special order to produce net income of $5.00 per ball? (d) What nonfinancial factors should management consider in making its decision? P26-2B Yin Manufacturing Company is tryin to decide whether to continue

Answer 1

CAL YMO Sol. (a) kobe Inc. Incremental Analysis Reject the Accept the Particulars Order Special Order Difference Sale's $4,500,000 $4,788,000 $288.000 leno Cost of Good Soldi- Variabile $2,250,000) $(2475,000) $(225,000) fixed $ 900,000 ) $900,000) 0 Gross Profit 1$ 1,350,000 $1413,000 $ 63,000 Jessi-Sellinge Administrative - Expenses :- Variable $(2 25,000) $(252,000) $(27000) fixed $(1 35,000) $135,000) RISCO - Net Income 990,000 $1026000 | $ 36,000 m

Sol (6) Kobe Inc. should accept the Order because it will increase operating income by $36,000. Sol. (C) Desireed poo fiti = 9000 $5 = $45.000 Desired Gross profit => - - Desired profit + Verriable Selling & Admin. Expense = $45,000 + $27000 = $72000 Desired Sales > : z Desired Gross profit +Variable Cost of Goods Sold $7 2006 + '$225.000 3 $ 297,000 Desired Selling price for maintain profit or net in come $5, pover ball is- o - Desired sales Number of vuil sold - $299,000 __9000 $33 ben ball

Sold Non financial factors such as the impact on sale if the Current Customers were to find out about the lower price, the repoutation of the buyer and the location where the product will be sold Should be taken into account.

_Worluing Notes 1. Sales - $50 per ball Reject the Order, & 90,000 ball's X è $ 45.00.000 Accept the special Ordena) = kobe Own Sales & Additional Saules. = (90.000ball's x $50 ) + (9000 ball's x $ 32) - $4500.000 + $ 288,000 = $ 4,788,000 2. Variable Cost of Gool's sold i Reject the ordero Variable Cest of goods Sold-> = Total Cost of goods sold - fixed Cost of goods sold E $3,150,000 - $ 900.000 = $ 2250,000 Accept the Special Order år - - Variable Cost- of goods Sold of kobe & Additional $2,250,000ť 9000 X$25 $ 2.250.000 +$225,000 2 $ 2475,000

MV _3Variable Selling & Administer subire Expeuse - Repeat the order - z Totale selling & Admin. ex peuse - Pixsed selling & Admin : a $ 3Goeie - $ 135,000 =_$225,000 per ball Variable selling & Admin. Expense =) $ 225,000 90,000 $2.50 perball Accept the Special orden =) a Kobe's own Variable & selling & Admin. Expense & Additional $ 225,000 + 9ooo ballsx ($2.50 +$0.50) __$225,000 + 9000 balls x $ 3.00 $ 225.000 + 27000 = $252,000