Question

Sampson Industries has an annual plant capacity of 70,000 ​units; current production is 59,000 units per year. At the current production​ volume, the variable cost per unit is $26.00 and the fixed cost per unit is $4.80. The normal selling price of Sampson​'s product is $41.00 per unit. Sampson has been asked by Caldwell Company to fill a special order for 7,000 units of the product at a special sales price of $20.00 per unit. Caldwell is located in a foreign country where Sampson does not currently operate. Caldwell will market the units in its country under its own brand​ name, so the special order is not expected to have any effect on Sampson​'s regular sales. Read the requirementsLOADING.... Requirement 1. How would accepting the special order impact Sampson​'s operating​ income? Should Sampson accept the special​ order? Complete the following incremental analysis to determine the impact on Sampson​'s operating income if it accepts this special order. ​(Enter a​ "0" for any zero balances. Use parentheses or a minus sign to indicate a decrease in contribution margin​ and/or operating income from the special​ order.) Incremental Analysis of Special Sales Order Decision Total Order (7,000 units) Revenue from special order $140,000 Less expenses associated with the order: Less: Variable manufacturing cost 182,000 Contribution margin $(42,000) Less: Additional fixed expenses associated with the order – Increase (decrease) in operating income from the special order

Answer 1

Answer:

Sampson Industries

1. How would accepting the special order impact Sampson​'s operating​ income?

The acceptance of the special order will decrease Sampson's operating income by $42,000.

2. Should Sampson accept the special​ order?

No.  Sampson should not accept the special order.  It does not make any contribution in reducing the fixed costs.  Instead, it decreases the net income.  Special orders should be accepted when they add to the contribution in defraying the fixed costs, even if they do not add to the net income.

Explanation:

a) Data and Calculations:

Annual plant capacity = 70,000 units

Current production = 59,000

Variable cost per unit = $26.00

Fixed cost per unit = $4.80

Normal Selling price per unit = $41

Special order = 70,000

Price of special order = $20

Incremental Analysis of Special Sales Order Decision

Total Order (7,000 units)

Revenue from special order $140,000

Less expenses associated with the order:

Less: Variable manufacturing cost 182,000

Contribution margin $(42,000)

Less: Additional fixed expenses associated with the order –

Increase (decrease) in operating income from the special order ($42,000)