Goodfellow Company had the following results of operations for the past year: Sales (8,000 units at $6.80)$ 54,400Materials and direct labor(20,000)Overhead (40% variable)(10,000)Selling and administrative expenses (all fixed) (6,000)Operating income $ 18,400?A foreign company offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Prepare an analysis of this additional business to show whether Goodfellow should take this order.
What will be an ideal response?
| Incremental revenues and costs Sales (2,000 * $5.00) | ? | $10,000 |
| Materials and direct labor ($20,000/8,000) * 2,000 | $5,000 | ? |
| Variable overhead [(40% * $10,000)/8,000] * 2,000 | 1,000 | ? |
| Shipping expenses | 1,200 | (7,200) |
| Increase in operating income | ? | $ 2,800 |
Thus, since operating income will increase by $2,800, Goodfellow should take the order.
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