Question

Pocket Company manufactures toasters. For the first 8 months of 2014, the com- pany reported the following operating results while operating at 75% of plant capacity E7-2B Sales (400,000 units) Cost of goods sold Gross profit Operating expenses $4,000,000 2,800,000 1,200,000 SO,000 $ 360.000 Net income Cost of goods sold was 75% variable and 25% fixed. Operating expenses were 70% vari- able and 30% fixed. In September, Pocket Company receives a special order for 60,000 toasters at $8 each from Sparkle Company of Carson City. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed operating expenses. Instructions (a) Prepare an incremental analysis for the special order (b) Should Pocket Company accept the special order? Why or why not?

Answer 1

SOLUTION

Question -1

1.

Particulars	Reject order	Accept order	Difference increase / Decrease
Sales	0	480,000	480,000
Cost of goods sold	0	315,000	315,000
Operating expenses	0	104,500	104,500
Net income	0	60,500	60,500

Sales = Number of units * Selling price per unit

= 60,000 * $8 = $480,000

Cost of goods sold = Cost of goods sold for the period / Total units * Units of special order * Variable cost percentage

= $2,800,000 / 400,000 * 60,000 * 75%

= 315,000

Operating expenses = Operating expenses for the period / Total units * Units of special order * Variable cost percentage

= $900,000 / 400,000 * 60,000 * 70%

= 94,500

Total operating expenses for special order = 94,500 + 10,000 = 104,500

2. Net income will increase by $60,500, so order should be accepted.

** Both the questions provided are independent to each other, so as per HOMEWORKLIB RULES I have answered first question