Question

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.")

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.

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.”)

Please show work.

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

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

Analysis of special order

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 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

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.