Question

Ivanhoe Sports Inc. manufactures basketballs for the Women's National Basketball Association (WNBA). For the first 6 months of 2020, the company reported the following operating results while operating at 80% of plant capacity and producing 120,000 units. Amount Sales $4,680,000 Cost of goods sold 3,582,000 Selling and administrative expenses 513,400 Net income $584,600 Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $271,000. In July, normally a slack manufacturing month, Ivanhoe Sports receives a special order for 10,000 basketballs at $29 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.75 per unit because of shipping costs but would not increase fixed costs and expenses. (a) & (b) - Your answer is partially correct. (a) Prepare an incremental analysis for the special order. (Round all per unit computations to 2 decimal places, e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).)

Answer 1

Maximum capacity = 120000/80% = 150000 units ,so acceptance of offer of 10000 units will not effect regular sales .

variable cost varies with number of units produced and sold thus it is always a relevant cost to decision making as it is an incremental cost to be incurred .

Fixed cost remains constant and will be incurred whether offer is accepted or not ,thus it is irrelevant to decision making unless avoidable.

Calculation of variable cost per unit:

	Variable cost (Total)	Variable cost per unit
cost of goods sold	3582000-960000=2622000	2622000/120000= 21.85
selling and administrative	513400-271000=242400	242400/120000 =$ 2.02

#selling and administrative cost per unit for special offer = 2.02+.75= 2.77

a).

.

	Reject order	Accept order	Net income increase /(Decrease)
Revenue	0	10000*29=290000	290000
cost of goods sold	0	10000*21.85= -218500	-218500
selling and administrative expense	0	10000*2.77= -27700	-27700
Net income	0	43800	43800

b)special order should be accepted as it will result in increase in net income amounting to $ 43800