The Project:

Develop a report on ‘short-run decision making’ and present it in the class. Your report to be submitted to the instructor should also include solutions for the following problems.

Problem 1

Consider the following details of the income statement of KDF Company for the year just ended December 31, 20 x x.

Sales (1,000,000 units) Br. 20,000,000

Manufacturing cost of goods sold 15,000,000

Gross margin Br. 5,000,000

Selling and administrative expenses 4,000,000

Operating income Br . 1,000,000

The company’s fixed manufacturing costs were Br.3 million and its fixed selling and administrative costs were Br.2.9 million.

Near the end of the year, Ethio Company offered KDF Br.13 per unit for 100,000 unit special order. The special order would not affect KDF’s regular business in any way. Furthermore, the special sales order would not affect total fixed costs and would not require any additional variable selling and administrative expenses.

Instruction: Assume that the company would utilize its idle manufacturing capacity to accept the special order. And use contribution margin approach. a) Should KDF accept or reject the special order?

b) By what percentage the operating income decreases or increases if the order had been accepted?