Gold corporation manufactures basketballs. currently they have capacity to produce 15000 basketball during this quarter. Gold...
Gold corporation manufactures basketballs. currently they have capacity to produce 15000 basketball during this quarter. Gold corp. receive a special order request from Diamond for 2000 basketball. Diamond offer to purchase the basketballs for $45 per unit. normal production costs are direct materials of $10/unit, direct labor of $15/unit, available manufacturing overhead of $2.5/unit and fixed manufacturing overhead of $10,000.
each unit take 0.5 hours to produce. to fulfill the order gold corp. would also incur a selling cost of $3/unit. as of now, gold corp. is operating at 80% capacity.
1. from financial viewpoint, perform an incremental analysis to see if gold corp. should accept this special order?
2. how would your analysis change if Gold Corp. was operating at full capacity?
Homework Answers
| Part 1 - Gold Corporation - Incremental Analysis | ||||
| Reject Order | Calculation | Accept order | Net Increase ( decrease) | |
| Revenues | 0 | 2000 units* 45 | 90000 | 90000 |
| Less:- COGS | 0 | |||
| DM | 0 | 2000 units* 10 | 20000 | 20000 |
| DL | 0 | 2000 units* 15 | 30000 | 30000 |
| VOH | 0 | 2000 units* 2.5 | 5000 | 5000 |
| Selling exp. | 0 | 2000 units* 3 | 6000 | 6000 |
| Net Income | 0 | 29000 | 29000 | |
| Gold corp. should accept the order as it would result in income of $ 29000. | ||||
| Part 2 | ||||
| If gold corp. was operating at full capacity, then it has to forego its normal sales and therefore, we will | ||||
| also consider loss in contribution margin from normal sales . | ||||
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