Question

Tolman Sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair: E (Click the icon to view the cost information.) Tolman has enough idle capacity to accept a one-time-only special order from Alaska Shades for 25,000 pairs of sunglasses at $83 per pair. Tolman will not incur any variable selling expenses for the order. Read the requirements. Requirement 1. How would accepting the order affect Tolman's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Tolman's managers consider in deciding whether to accept the order? Prepare the analysis to determine the effect on operating income. (Enter decreases to profits with a pare Data Table Expected increase in revenues sunglasses x Expected increase in expenses sunglasses x Direct materials 39 in operating income Expected Direct labor 16 Variable manufacturing overhead i Requirements Variable selling expenses 3 25, Fixed manufacturing overhead 1. How would accepting the order affect Tolman's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Tolman's managers consider in deciding whether to accept the order? $ 92 Total cost * $2,250,000 Total fixed manufacturing overhead / 90,000 Pairs of sunglasses 2. Tolman's marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $83 is less than Tolman's $92 cost to make the sunglasses. Kyler asks you, as one of Tolman's staff accountants, to explain whether his analysis is correct. What would you say? Print Done Check Answer

Answer 1

Tolman Sunglasses Requirement 1 Incremental analysis Per unit Total order ( 25,000 units) 2075000 Revenue from special order Less: variable expenses associated w/ order Variable manufacturing costs Contribution margin Less: additional fixed expenses associated w. order 1600000 475000 Increase (decrease) in operating income from the special order = $475000 Requirement 2 When deciding whether to accept a special order we should compare the extra revenues we will receive against the extra cost we will incur to fill the order. Costs that we incur whether or not we fill the order are irrelevant to our decision. This is why comparing the $83 price Montana Glasses offered us with our $92 total costs of making and selling the sunglasses is misleading.