Question

James & Co., which has excess capacity, received a special order for 4,000 units at a price of $18 per unit. Currently, production and sales are budgeted for 25,000 units without considering the special order.

Budget information for the current year is presented below:

       Sales               $ 900,000
       Less: Cost of goods sold   600,000
       Gross margin           $ 300,000
       Less: Operating expenses   200,000
       Net income           $ 100,000

James & Co. estimates that 70% of Cost of goods sold is variable manufacturing costs and 60% of Operating expenses are fixed costs.

  

Use the following information for the next 2 questions. James & Co., which has excess capacity, received a special order for 4,000 units at a price of $18 per unit. Currently, production and sales are budgeted for 25,000 units without considering the special order. Budget information for the current year is presented below: Sales Less: Cost of goods sold Gross margin Less: Operating expenses Net income $ 900,000 600,000 $ 300,000 200,000 $ 100,000 James & Co. estimates that 70% of Cost of goods sold is variable manufacturing costs and 60% of Operating expenses are fixed costs. 11. If the order is accepted, net income will: a. Increase b. Decrease c. Remain the same d. More information is need to answer the question e. None of the above 12. Refer to the previous question. By what amount, if any, will net income change? (If net income will not change or more information is needed to answer the previous questions, state your answer as "N/A.")

11.If the order is accepted, net income will:
a.Increase
b.Decrease
c.Remain the same
d.More information is need to answer the question
e.None of the above

12.Refer to the previous question. By what amount, if any, will net income change? (If net income will not change or more information is needed to answer the previous questions, state your answer as “N/A.”)

   XYZ Corporation incurs joint processing costs for Product A and Product B. XYZ can either sell Product A and B at the split-off point or process each further. Information about Product A and B follows.

19.What should XYZ Corp. do with regard to Product A?
a.Process beyond split-off
b.Sell at the split-off

20.What should XYZ Corp do with regard to Product B?
a.Process beyond split-off
b.Sell at the split-off

Answer 1

James & Co. estimates that 70% of Cost of goods sold is variable manufacturing costs and 60% of Operating expenses are fixed costs.

Total Variable Cost of goods sold = 600,000 x 70%

= $420,000

Variable Cost of goods sold per unit = Total Variable Cost of goods sold/Number of units sold

= 420,000/25,000

= $16.8

60% of Operating expenses are fixed costs, it means remaining 40% are variable costs.

Total Variable operating expenses = 200,000 x 40%

= $80,000

Variable operating expenses per unit = Total Variable operating expenses/Number of units sold

= 80,000/25,000

= $3.2

Due to the acceptance of special order, only variable costs will increase and fixed costs will remain unaffected.

Special order analysis

Sales revenue (4,000 x 18)	72,000
Less: Expenses:
Variable Cost of goods sold (4,000 x 16.80)	- 67,200
Variable operating expenses (4,000 x 3.20)	- 12,800
Net loss	- $8,000

11.

If the special order is accepted, net income will decrease.

Correct option is (b)

12.

From the above analysis, it can be seen that net income will decrease by $8,000

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