Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units: Sales ($45 unit) …………..…………….…$4,500,000Less costs and expenses:Direct materials ($16/unit)………….…$1,600,000Direct labor ($9/unit)…………….….… 900,000Variable overhead ($3/unit)…….…….. 300,000Fixed overhead ($8.10/unit)…….......... 810,000Variable administrative ($4.50/unit)…. 450,000Fixed administrative ($4/unit)………... 400,000Total costs and expenses……………... $(4,460,000)Operating income…………………………$ 40,000A foreign buyer wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also
agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.Required:(1) Should Generalware accept the order if it does not affect regular sales? Explain.(2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?
What will be an ideal response?
(1) Additional operating income from special order:
| Sales (15,000 * $36) ……………………………. | $ 540,000 |
Less incremental costs and expenses:
| Direct materials (15,000 * $16) | $ 240,000 |
| Direct labor (15,000 * $9) | 135,000 |
| Variable overhead (15,000 * $3) | 45,000 |
| Additional fixed overhead | 60,000 |
| Variable administrative | | 0 |
| Additional fixed administrative | 0 |
| Total incremental costs and expenses | ………….. | $ (480,000) |
Additional operating income from the order……. $ 60,000
Generalware should accept this order as it increases operating income.
| (2) Additional income from special order: | $ 60,000 |
Income lost from sale of 5,000 regular units:
| Selling price per unit | $45.00 |
| Direct materials per unit | | 16.00 |
| Direct labor per unit | 9.00 |
| Variable overhead per unit | 3.00 |
| Variable administrative cost per unit | 4.50 |
| Total variable cost per unit | $32.50 |
| Contribution margin per unit | $12.50 |
| Total contribution margin lost (5,000 * $12.50).. | $(62,500) |
| Net decrease in operating income…………………….... | (2,500) |
The company should not accept the special order as it decreases operating income.
Business
