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. 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.”)

Help

Answer 1

Variable Cost of goods sold = 70%

Fixed Operating expenses = 60%

Hence, Variable Operating expenses = 40%

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

Evaluation 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 special order is accepted, net income will decrease.

Correct option is (b)

12.

Net income will decrease by $8,000

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