Answer:
Rainy Days Company
a. Incremental Analysis of the Special Order:
Incremental Analysis Normal Increment
Sales revenue $960,000 $160,000
Cost of goods sold:
Variable costs (80%) 393,600 82,000
Fixed costs (20%) 98,400 0
Total cost of goods sold 492,000 82,000
Gross profit $468,000 78,000
Operating expenses 36,000 60,000
Net operating income $432,000 $18,000
b. Rainy days should accept the special order.
c. Rainy days should charge $17.43 per unit for the special order
Explanation:
a) Data and Calculations:
Operating capacity (80%) = 96,000 units
100% capacity = 120,000 units (96,000/0.8)
Sales revenue $960,000
Cost of goods sold 492,000
Gross profit $468,000
Operating expenses 36,000
Net operating income $432,000
At full capacity, price for the special order:
Cost of goods sold:
Variable costs (80%) $82,000
Fixed costs (20%) 98,400
Total cost of goods sold 180,400
Operating expenses 60,000
Total cost of special order $240,400
Units of the special order 20,000
Unit cost = $12.02
Net income margin (45%) 5.41
Total price to charge $17.43
b) The full fixed cost was charged for the special order if Rainy days Company operates at full capacity before receiving the special order. Fixed cost does not vary according to the level of activity. It has a step-cost feature, which means that to increase capacity by 20,000 units, the company will incur additional fixed cost $98,400.
