Question

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Special Order Example #2 Garston Company produces a single model wind turbine and has an annual plant capacity of 3,000 units. Data concerning this product are given below: 2,500 units $ Annual sales at regular selling prices Manufacturing costs: Variable manufacturing cost per unit Fixed (annual) Selling and administrative expenses: Variable (sales commissions) Fixed (annual) 2,000 750,000 150 55,000 The company has received a special order for 650 units at a selling price of $2,700 each. The regular sales price is $3,000. The sales commissions on the 650 units would be reduced by one-third. This special order would have no impact on total fixed costs. 1. What effect would accepting the special order have on the company's net operating income?

Answer 1

Compute the change in operating income if the special order is accepted as given below: Regular sales Offer sales $1,950,000 $1,755,000 $1,300,000 $1,300,000 Particulars 2 Sales 3 Less: Manufacturing cost 4 Variable manufaturing cost 5 Selling and administrative expenses 6 Variable (Sales commission) 7 Operating income 8 Change in operating income $97,500 $552,500 $65,000 $390.000 $162,500 Compute the change in operating income if the special order is accepted using spreadsheet formulas as given below: BC Regular sales Offer sales =650*3000 =650*2700 1=650*2000 =650*2000 Particulars 2 Sales 3 Less: Manufacturing cost 4 Variable manufaturing cost 5 Selling and administrative expenses 6 Variable (Sales commission) 7 Operating income 8 Change in operating income =150*650 =B2-B4-B6 =B6-B6*1/3) =C2-C4-C6 =B7-C7 Thus, effect on operating income is decrease by $162,500. Steps followed to determine the change in operating income are given below: • Prepare an income statement for regular sales and offer sales. • Regular sales are the normal selling price of the inventory sold. Offer sales is the sales at offer price. • Variable cost is reduced from sales by determining by multiplying cost per unit with units sold. • Sales commission is computed by applying sales price per unit with units sold. In special offer, selling and administrative expenses is reduced by one third. Compute operating income by reducing manufacturing expenses and sales commission.