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)
