Special order
Q#1 Woody Company, which manufactures sneakers, has enough idle capacity available to
accept a special order of 20,000 pairs of sneakers at $6.00 a pair. The normal selling price is $10.00
a pair variable manufacturing cost are $ 4.50 a pair, and fixed manufacturing costs are $1.50 a pair.
Woody will not incur any selling expenses as a result of the special order. What would the effect
on operating income be if the special order could be accepted without affecting normal sales?
Q#2 Brike Company, which manufactures robes, has enough idle capacity available to accept a
special order of 10,000 robes at $8 a robe. A robe predicted income statement for the year without
this special order is as follows:
PER UNIT
Sales
TOTAL
$ 12.50
$1,250,000
$ 6.25
$ 625,000
1.75
175,000
Total manufacturing costs
$ 8.00
$ 800,000
Gross profit
$ 4.50
$ 450,000
$ 1.80
$ 180,000
1.45
$ 145,000
Total Selling Expenses
$ 3.25
$ 325,000
Operating Income
$ 1.25
$ 125,000
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Manufacturing costs:
Variable
Fixed
Selling Expenses:
Variable
Fixed
Assuming no additional selling expenses, what would be the effect on operating income if
the special order was accepted?
Q#3 Lincoln Company, a glove manufacturer, has enough idle capacity available to accept a
special order of 20,000 pairs of gloves at $12.00 a pair. The normal selling price is $20.00a pair.
Variable manufacturing costs are $9.00 a pair, and fixed manufacturing costs are $3.00 a pair.
Lincoln will not incur any selling expenses as a result of the special order. What would be the
effect on operating income if the special order could be accepted without affecting normal sales?
Q No.4
Boyer Company manufactures basketballs. The forecasted income statement for the
year before any special orders is as follows:
AMOUNT
PER UNIT
Sales
$ 4,000,000
$ 10.00
Manufacturing cost of goods sold
$ 3,200,000
8.00
Gross profit
$
Selling Expenses
Operating income
$
800,000
$ 2.00
300,000
$ .75
500,000
$1.25
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Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing
cost of goods sold and $100,000 in selling expenses.
A special order offering to buy 50,000 basketballs for $7.50 each was made to Boyer. There
will be no additional selling expenses if the special order is accepted. Assuming Boyer has
sufficient capacity to manufacture 50,000 more basket balls, by what amount would operating
income be increased or decreased as a result of accepting the special order?
Q#5 The manufacturing capacity of Jordan Company's facilities is 30,000 writs of product a
year. A summary of operating results for the year ended December 31, 19X2, is as follows:
Sales (18,000 units @ $100)
$ 1,800,000
Variable Manufacturing and selling costs
990,000
Contribution Margin
$
810,000
Fixed costs
$
495,000
Operating Income
$
315,000
A foreign distributor has offered to buy 15,000 units at $90 per unit during 19X3. Assume
that all of Jordan's costs would be at the same levels and rates in 19X3 as in 19X2. If Jordan
accepted this offer and rejected some business from regular customers so as not to exceed capacity,
what would be the total relevant income from accepting the special offer?
Q No.6 Evaluating a special Order
Bawling Company manufactures footballs and has enough idle capacity to accept a special order for
20,000 footballs to be sold for $14 each. The footballs normally sell for $20 each. The variable
manufacturing costs are $10 per balls, and fixed manufacturing overhead is $5 per ball. There will be no
additional selling or administrative costs related to the special order, and the special order will not affect
normal sales.
Required:
Calculated the effect on net income if the special order is accepted.
Q No.7 Evaluating a Special Order
Clean-it Company produces cleaning kits for shotguns. The production capacity available will enable the
firm to produce 500,000 kits annually. A projected income statement for next year shows
Sales (460,000 kits)
$4,600,000
Costs of goods sold
2,960,000
Gross profit
1,640,000
Selling and administrative expenses
1,250,000
Net income
$ 390,000
Fixed manufacturing overhead costs included in the cost of goods sold are $ 1,120,000. A 10% sales
commission is paid to sales representatives for each kit sold. The purchasing department of a large
discount chain has offered to purchase 30,000 kits at $6 each. The Clean-it Company sales manager’s
initial response is to refuse the offer because he concludes that the $6 price is below the firm’s average
cost 2,960,000/460,000. The sales commission would not be paid on the special order.
Required:
A. Should the special offer be accepted? What would be the impact on net income?
B. Assume that the offer was for 50,000 kits. Should it be accepted? Show your
calculations.
C. Ignore part B. What is the lowest price the firm could accept if it wants to earn annual
net income of $480,000?
Q No.8 Evaluating a Special Order
Driftwood Company produces flower vases. The operating results of the preceding year were:
Sales(77,000 units@ $8)
Cost of goods sold
Direct materials
Direct labor
$616,000
115,500
154,000
Manufacturing overhead
Total
Gross profit
Selling expenses
Administrative expenses
Total operating expenses
Net income
92,400
361,900
254,100
38,500
23,100
61,600
$192,500
The company has received a special order to buy 10,000 vases at a unit cost of $6.80. Materials cost per
unit would not change, but the labor costs for the special order would be 20% greater than normal since
some overtime wages would be incurred. Fixed manufacturing overhead is 50% of the variable
manufacturing overhead at the present level of production. Fixed manufacturing overhead would not
change and there would be no additional variable or fixed selling expenses. The administrative
expenses, which are all fixed, would increase $2,000 if the special order is accepted. Current variable
selling expenses are $0.20 per unit. The company has a maximum capacity of 85.000 vases, so the
company would have to reduce its regular sales by 2,000 units if it accepts the special order.
Required:
A. Should the company accept the special order? Why?
B. What would be the effect on the firm’s profits?
Q No.9 Evaluating a Special Order
Flame Company manufactures gas grills and is considering expanding production. A distributor has
asked the company to produce a special order of 8,000 grills to be sold overseas. The grills would be sold
under a different brand name and would not influence Flame Company’s current sales. The plant is
currently producing 95,000 units per year. The company’s maximum capacity is 100,000 units per year,
so the company would have to reduce the production of units sold under its own brand name by 3,000
units if the special order is accepted. The company’s income statement for the previous year is
presented below:
Sales(95,000 units)
Cost of goods sold:
Direct materials
$2,375,000
Direct labor
1,900,000
Manufacturing overhead
1,425,000
Gross Profit
Selling expenses
575,000
Administrative expenses
237,500
Net income
$7,125,000
5,700,000
1,425,000
812,500
$ 612,500
The company’s variable manufacturing overhead is $ 10 per unit and the variable selling expense is
$5 per unit. The administrative expense is com0pletely fixed and would increase by $5,000 if the special
order is accepted. There would be no variable selling expense associated with the special order, and
variable manufacturing overhead per unit would remain constant.
The company’s direct labor cost per unit for the special order would increase 20% while direct
materials cost per unit for the special order would increase 10%. Fixed manufacturing overhead and
fixed selling expense would not change.
Required:
If the distributor has offered to pay $65 per unit for the special order, should the company accept the
offer? Justify your answer.
Make or buy
Q#1Dixon Company manufactures part 347 for use in one of its main products.
Normal annual production for part 347 is 100,000 units. The costs per 100 units is as follows
Direct material………………..
Direct labor……………….......
Manufacturing overhead:
Variable ………………............
Fixed ………………..............
Total costs per 100 units……...
Solve the following two unrelated questions:
$260
100
120
160
$640
Q No.2: Evaluating a Make-Buy Situation
A manufacturer of television sets is considering ways to increase the firm’s plant capacity utilization
because it has recently been operating at 70% of capacity. One proposal is to make a component which
is currently being purchased for $75 per unit. Based on a study by the firm’s controller, the cost to
produce the component is as follows:
Direct materials
$24.00
Direct labor(3 hours@ $11.20 per hr)
33.60
Manufacturing overhead(applied based on direct labor hrs) 24.00
Total
$81.60
The anticipated work activity for the year is 250,000 direct labor hours. Fixed manufacturing overhead
for the year is budgeted at $1.75 million.
Required:
You have been asked by the controller to determine if the component should be built internally or
purchased. Calculate the per unit cost differential between making and buying the component.