E7-3 Moonbeam Company manufactures toasters. For the first & months of 2017, the company reported the following operating results while operating at 75% of plant capacity: fo
Sales (350,000 units)
$4,375,000
Cost of goods sold
2,600,000
1,775,000
840,000
Gross profit
Operating expenses
$ 935,000
Net Income
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed.
In September, Moonbeam receives a special order for 15,000 toasters at $7.60 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an addi tional $3,000 of shipping costs but no increase in fixed costs.
Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Moonbeam accept the special order? Why or why not?
The Correct Answer and Explanation is :
The incremental analysis shows that accepting the special order would result in an incremental net income of $4,200. Since the special order contributes positively to the company’s profitability and does not increase fixed costs, Moonbeam Company should accept the order.
Explanation:
Moonbeam Company is operating at 75% capacity, meaning it has unused production capacity. When evaluating a special order, only incremental costs and revenues should be considered. Fixed costs remain unchanged and are not relevant for this decision.
- Revenue from Special Order:
- The special order is for 15,000 toasters at $7.60 each.
- Total additional revenue:
[
15,000 \times 7.60 = 114,000
]
- Incremental Costs:
- Cost of Goods Sold (COGS) is 70% variable. The variable cost per unit is calculated from the total COGS and the number of units produced.
- Operating expenses are 80% variable. The variable portion per unit is calculated similarly.
- Additional shipping costs amount to $3,000. Total variable cost per unit = Variable COGS per unit + Variable Operating Expense per unit.
Multiplying this by 15,000 units gives total incremental variable costs of $106,800. Adding the shipping cost of $3,000 results in total incremental costs of $109,800.
- Profit Impact:
- Incremental revenue: $114,000
- Total incremental costs: $109,800
- Net incremental income: $4,200
Since the special order results in a profit increase of $4,200 and does not affect fixed costs, accepting it is beneficial as long as it does not interfere with regular sales.