Question

Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units: Sales ($45 unit) …………..…………….… $4,500,000 Less costs and expenses: Direct materials ($16/unit)………….… $1,600,000 Direct labor ($9/unit)…………….….… 900,000 Variable overhead ($3/unit)…….…….. 300,000 Fixed overhead ($8.10/unit)…….......... 810,000 Variable administrative ($4.50/unit)…. 450,000 Fixed administrative ($4/unit)………... 400,000 Total costs and expenses……………... $(4,460,000) Operating income………………………… $ 40,000 A foreign buyer wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order. Required: (Please lay out your calculation details to support your conclusion. Correct conclusion only will be awarded 5 points without support calculation). Hint: What your incremental income is if you are accepting the special offer? (1) Should Generalware accept the order if it does not affect regular sales? Explain. (2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?

Answer 1

Answer:

Explanation:

Foreign buyers interest

Units

15000

Sales revenue (15,000* 36)                540000

Direct material (15000*16)                  240000    

Direct labor   (15000*9)                       135000

Variable overhead cost(15000*3)        45,000

Incremental fixed expenses                 60,000

Incremental net income                        60,000  

1)He should affect the order if regular sales is not affected.

2)Unit selling price 45

Direct material - 16

Direct labor - 9

Variable overhead -3

Variable admin - 4.5

Contribution = 12.5

Contribution on 5000 units = $62,500.

Under this circumstance , he should not accept the offer as he stands to looses a sales contribution of $62500 for $60000, Net income will fall by $2,500.