Question

Moonbeam Company manufactures toasters. For the first 8 months of 2020, the company reported the following operating results while operating at 75% of plant capacity:
Sales (358,400 units) $4,377,000
Cost of goods sold 2,590,720
Gross profit 1,786,280
Operating expenses 837,760
Net income $948,520

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Cullumber receives a special order for 24,500 toasters at $8.38 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $2,900 of shipping costs but no increase in fixed costs.

Required:
Prepare an incremental analysis for the special order.

Answer 1

Answer:

Net Income will increase by $32,625

Explanation:

The Incremental analysis for the special order is done below:

                                    Reject Order    Accept Order   Net Income -

                                                                                        Increase/(decrease)

Revenue                                $0.00        $205,310            $205,310          

Cost of goods Sold               $0.00        ($123,970)           ($123,970)

Operating Expense               $0.00        ($48,715)              ($48,715)

Net Income                            $0.00         $32,625               $32,625

Revenue

This is calculated by multiplying the number of units of special order with the price per unit i.e. $8.38. As shown below:

24,500 x $8.38 = $205,310

Cost of Goods Sold

As there is only change in the variable cost due to the manufacturing of additional units. Therefore, we would calculate the additional variable cost by multiplying the number of units with the variable cost per unit.

Variable Cost per unit = (2,590,720 * 70%) / 358,400 units = $5.06 per unit

Cost of Goods Sold = 24,500 x $5.06 = $123,970

Operating expense

As there is only change in the variable cost due to the manufacturing of additional units. Therefore, we would calculate the additional variable cost by multiplying the number of units with the variable cost per unit. Then we would add the additional shipping cost of $2,900/

Operating Expense Variable Cost per unit = (837,760 * 80%) / 358,400 units = $1.87 per unit

Operating Expense = 24,500 x $1.87 = $45,815 + $2900 = $48,715