Question

Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.90 per package. Annual costs for the production and sale of this quantity are shown in the table. Direct materials $ 512,000 Direct labor 128,000 Overhead 384,000 Selling expenses 160,000 Administrative expenses 107,000 Total costs and expenses $ 1,291,000 A new wholesaler has offered to buy 67,000 packages for $3.50 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ 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. 25% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 75% of the annual overhead cost is variable with volume. Accepting the new business would involve no additional selling expenses. Accepting the new business would increase administrative expenses by a $4,000 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

			400,000	67,000
			Per unit amounts		Total
			Normal	New	Normal	New	Combined
			Volume	Business	Volume	Business
Sales			3.9	3.5	1560000	234500	1794500
Variable costs:
Direct Materials			1.28	1.28	512000	85760	597760
Direct Labor			0.32	0.48	128000	32160	160160
Variable Overhead			0.72	0.72	288000	48240	336240
Total Variable costs			2.32	2.48	928000	166160	1094160
Contribution margin			1.58	1.02	632000	68340	700340
Fixed costs:
Fixed overhead					96000	0	96000
Administrative expenses					107,000	4,000	111,000
Selling expenses					160,000	0	160,000
Total fixed costs					363000	4000	367000
Operating income					269000	64340	333340