Question

Jones Products manufactures and sells to wholesalers approximately 200,000 packages per year of underwater markers at $3.99 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials	$	256,000
Direct labor		64,000
Overhead		192,000
Selling expenses		80,000
Administrative expenses		53,000
Total costs and expenses	$	645,000

A new wholesaler has offered to buy 33,000 packages for $3.42 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’s sales through its normal channels. A study of the costs of this additional business reveals the following:

• Direct materials costs are 100% variable.
• Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate.
• 30% of the normal annual overhead costs are fixed at any production level from 150,000 to 300,000 units. The remaining 70% of the annual overhead costs are variable with volume.
• Accepting the new business would involve no additional selling expenses.
• Accepting the new business would increase administrative expenses by a $2,000 fixed amount.

Required:
Complete the three-column comparative income statement that shows the following. (Round your intermediate calculations and per unit cost answers to 3 decimals.)

1. Annual operating income without the special order.
2. Annual operating income received from the new business only.
3. Combined annual operating income from normal business and the new business.

Answer 1

1. Annual operating income without the special order:

Particulars	Amount ($)
a. Sales (in units)	2,00,000.000
b. Selling price per unit ($)	3.990
c. Total sales ($) (a * b)	7,98,000.000
d. Direct material cost	2,56,000.000
e. Direct Labour	64,000.000
f. Overheads
Fixed overheads ($192,000 * 30%)	57,600.000
Variable overheads ($192,000 * 70%)	1,34,400.000
g. Selling expenses	80,000.000
h. Administrative expenses	53,000.000
i. Total cost and expenses (d+e+f+g+h)	6,45,000.000
j. Net operating income (c - i)	1,53,000.000

2. Annual operating income from new business only:

Particulars	Amount ($)
a. Sales (in units)	33,000.000
b. Selling price per unit ($)	3.420
c. Total sales ($) (a * b)	1,12,860.000
d. Direct material cost	42,240.000
($256,000 / 200,000 * 33000)
e. Direct Labour	15,840.000
[($64,000 / 200,000 *33,000)* $1.50)]
f. Overheads
Fixed overheads (See note below)	-
Variable overheads [($192,000*70%)/ 200,000 ] * 33000	22,176.000
g. Selling expenses	-
h. Administrative expenses	2,000.000
i. Total cost and expenses (d+e+f+g+h)	82,256.000
j. Net operating income (c - i)	30,604.000

Note: Since fixed overheads will be incurred irrespective of the production needs for the business. Hence, it will not be considered for the special offer received.

Conclusion: From the above, we can observe that the operating income is resulting in positive figure and hence the offer can be accepted.

3. Combined annual operating income from normal business and the new business:

Particulars	Amount ($)
a. Sales for normal business (200,000 * $3.99)	7,98,000.000
b. Sales for new business (33,000 * $3.42)	1,12,860.000
c. Total sales ($) (a + b)	9,10,860.000
d. Direct material cost
Normal business (Given)	2,56,000.000
New business ($256,000 / 200,000 * 33000)	42,240.000
e. Direct Labour
Normal business (Given)	64,000.000
Additional units [($64,000 / 200,000 *33,000)* $1.50)]	15,840.000
f. Overheads
Fixed overheads ($192,000 * 30%)	57,600.000
Variable overheads [($192,000*70%)/ 200,000 ] * 233,000	1,56,576.000
g. Selling expenses	80,000.000
h. Administrative expenses	55,000.000
i. Total cost and expenses (d+e+f+g+h)	7,27,256.000
j. Net operating income (c - i)	1,83,604.000