ABC Inc is manufacturing pens and selling them to wholesalers and retail customers. Consider the following details
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ABC Inc is manufacturing pens and selling them to wholesalers and retail customers. | ||||
Consider the following details of the income statement of the ABC Inc. for the year ended December 31, 20x1 |
The income statement of ABC Inc. | ($) | |
Sales | 15,900,000 | |
Less cost of goods sold | (9,450,000) | |
= Gross margin or gross profit | 6,450,000 | |
Less selling and administrative expenses | (4,350,000) | |
= Operating income | 2,100,000 |
ABC's fixed manufacturing costs were $3.6 million and its fixed selling and administrative costs were $3.3 million. The division had produced and | |||||
sold 3 million pens. Near the end of the year, Pizzaria offered to buy 140,000 pens on special order for $610,400. To fill the order, a special Pizzaria | |||||
logo would have to be added to each pen, so ABC Inc should spend additional fixed manufacturing costs of $150,000 but would not affect | |||||
fixed selling & administrative costs. ABC Inc has sufficient capacity idle for this new order. In addition, the firm would have to incur an extra | |||||
manufacturing variable cost of $0.35 per pen to add the logo. | |||||
However, the president of ABC Inc rejected the special order of Pizzaria. He said, | |||||
"The Pizzaria offer is too low and affects fixed costs. We'd have to incur an extra manufacturing variable cost. If ABC sells below its regular selling prices, | |||||
it will begin a chain reaction of competitors' price-cutting and of customers wanting special deals. I believe in pricing at no lower than above | |||||
our full costs of $13,800,000 / 3,000,000 units = $4.60 per unit plus the extra variable manufacturing per pen and the additional fixed costs." | |||||
1. Using the contribution-margin technique, prepare an analysis for the following decision model. | |||||
Without Special Order | Effect of Special Order | Total including Special Order | |||
Units (#) | |||||
$/unit | ($) | $/unit | ($) | Total ($) | |
Sales | |||||
Fewer variable costs: | |||||
Manufacturing | |||||
Selling & administrative | |||||
Total variable costs | |||||
Contribution margin | |||||
Less fixed costs: | |||||
Manufacturing | |||||
Selling & administrative | |||||
Total fixed costs | |||||
Operating income | |||||
2. Do you agree with the decision of the president? Why or Why not? | |||||
Related Book For
Accounting Principles
ISBN: 978-1118342190
11th Edition
Authors: Jerry Weygandt, Paul Kimmel, Donald Kieso
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