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Serhud [2]
3 years ago
15

Gallerani Corporation has received a request for a special order of 4,300 units of product A90 for $26.90 each. Product A90's un

it product cost is $26.40, determined as follows: Direct materials$2.55 Direct labor 7.85 Variable manufacturing overhead 6.95 Fixed manufacturing overhead 9.05 Unit product cost$26.40 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $3.30 per unit and that would require an investment of $22,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:
Business
1 answer:
Ksivusya [100]3 years ago
4 0

Answer:

Effect on income= $4,875 increase

Explanation:

Giving the following formula:

Production costs:

Direct materials$2.55

Direct labor 7.85

Variable manufacturing overhead 6.95

Total= $17.35

Special offer:

Selling price= $26.9

Number of units= 4,300

Increase in variable cost= $3.3

Increase in fixed costs= $22,000

<u>Because it is a special offer and there is unused capacity, we will take into account only the incremental fixed costs.</u>

<u></u>

<u>To calculate the effect on income, we need to use the following formula:</u>

Effect on income= incremental contribution margin - incremental fixed costs

Effect on income=  4,300*(26.9 - 17.35 - 3.3) - 22,000

Effect on income= $4,875 increase

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                                                    Case A       Case B         Case C  

Net income                               $310,000         15,000 $420,000    

Depreciation expense                  40,000   150,000       80,000

Accounts receivable increase

(decrease                                      100,000 (200,000) (20,000)

Inventory increase (decrease)        (50,000)   35,000   50,000

Accounts payable increase           (50,000)   120,000   70,000

Accrued liabilities increase

(decrease)                                  60,000  (220,000) (40,000)

To calculate the operating activities section of cash flows for each of the given cases,

we use the Indirect method formula

Net cash flow from operating actvities  = Net Income + Non-Cash Expenses – Increase in Working Capital

Net cash flow from operating actvities =Net Income +/- Changes in Assets & Liabilities + Non-Cash Expenses

Net cash flow from operating actvities = Net Income + Depreciation + Stock Based Compensation + Deferred Tax + Other Non Cash Items – Increase in Accounts Receivable – Increase in Inventory + Increase in Accounts Payable + Increase in Accrued Expenses + Increase in Deferred Revenue

Following the formulae above, we can determine what expense should be added or subtracted to give the operating activities of cash flow below as

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Net Income               $310,000                15,000         $420,000  

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Depreciation                   40,000              150,000       80,000

Changes in Assets and Liabilities

Accounts Receivable        - 100,000       200,000           20,000

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Net Cash Provided by Operating Activities

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