Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2014 is as follows:
Shanghai Exports, LTD Budgeted Income Statement For the Year 2014 |
|
---|---|
Sales ($ 44 per unit) | $ 4,400,000 |
Cost of good sold ($ 32 per unit) | (3,200,000) |
Gross profit | 1,200,000 |
Selling expenses ($ 3 per unit) | (300,000) |
Net income | $ 900,000 |
Additional Information (1) Of the production costs and selling
expenses, $800,000 and $100,000, respectively, are fixed. (2)
Shanghai Exports, LTD received a special order from a hospital
supply company offering to buy 12,500 wall mounts for $30. If it
accepts the order, there will be no additional selling expenses,
and there is currently sufficient excess capacity to fill the
order. The company's sales manager argues for rejecting the order
because "we are not in the business of paying $32 to make a product
to sell for $30."
Calculate the net benefit (cost) of accepting the special
order.
Special order not accepted | Special order accepted | |||||
Units (a) | Per unit (b) | Amount (a*b) | Units (a) | Per unit (b) | Amount (a*b) | |
Sales ($4,400,000/$44) | 100,000 | $44 | $4,400,000 | 100,000 | $44 | $4,400,000 |
Sales due to special order | 12,500 | $30 | $375,000 | |||
Total Net sales (w) | 100,000 | $4,400,000 | 112,500 | $4,775,000 | ||
Less: Variable costs: | ||||||
Cost of goods sold ($3,200,000 - $800,000 = $2,400,000/100,000) | 100,000 | $24 | $2,400,000 | 112,500 | $24 | $2,700,000 |
Selling expenses ($300,000 - $100,000 = $200,000/100,000) | 100,000 | $2 | $200,000 | 100,000 | $2 | $200,000 |
Total Variable cost (x) | $2,600,000 | $2,900,000 | ||||
Contribution Margin (y = w - x) | $1,800,000 | $1,875,000 | ||||
Less: Fixed Costs: | ||||||
Cost of Goods Sold | $800,000 | $800,000 | ||||
Selling expenses | $100,000 | $100,000 | ||||
Total Fixed Costs (z) | $900,000 | $900,000 | ||||
Net Income (y - z) | $900,000 | $975,000 | ||||
Hence, the net benefit for accepting the special order is $75,000 ($975,000 - $900,000). Therefore, the special order can be accepted due to the positive net benefit. | ||||||
Note: For variable selling expenses, the units are taken as 100,000 under special order accepted in order to get the same selling expenses because as per the given problem, it is stated that the selling expenses will remain the same even the special order is accepted. |
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