Question

Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.
For the first 6 months of 2013, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000
Cost of goods sold $4,200,000
Gross profit $2,800,000
Operating expenses $2,000,000
Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.
Required:
(a) Prepare an incremental analysis for the special order.
(b) Should Gregg company accept the special order? Justify your answer.

Answer 1

Answer:

(a) Prepare an incremental analysis for the special order.

Sales ( 600 mats × $45 each)                     $ 27,000

Cost of Goods Sold ( 600 mats ×  $31.50)($ 18,900)

Gross Profit                                                     $ 8,100

Operating Costs ( 600 mats ×  $14.00)       ($ 8,400)

Shipping Costs                                              ($1,200)

Net Income                                                    ($1,500)

(b) Should Gregg company accept the special order?

No

Because the Order presents a financial disadvantage of $1,500.

Explanation:

Hint: Consider only the Incremental Costs and Revenues that relate to the 600 mat production

Cost of Goods Sold

Variable Cost per mat =   ($4,200,000 × 75%) / 100,000

                                    =    ($ 3,150,000)/ 100,000

                                    =     $31.50

Operating Costs

Variable Cost per mat = ($2,000,000 × 70%) / 100,000

                                     =  $14.00