ch11sol - CHAPTER 11 DECISION MAKING AND RELEVANT...

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CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-19 (30 min.) Special order, activity-based costing. 1. Award Plus’ operating income under the alternatives of accepting/rejecting the special order are: Without One- Time Only Special Order 7,500 Units With One- Time Only Special Order 10,000 Units Difference 2,500 Units Revenues $1,125,000 $1,375,000 $250,000 Variable costs: Direct materials 262,500 350,000 1 87,500 Direct manufacturing labor 300,000 400,000 2 100,000 Batch manufacturing costs 75,000 87,500 3 12,500 Fixed costs: Fixed manufacturing costs 275,000 275,000 –– Fixed marketing costs 175,000 175,000 –– Total costs 1,087,500 1,287,500 200,000 Operating income $ 37,500 $ 87,500 $ 50,000 1 7,500 $262,500 × 10,000 2 7,500 $300,000 × 10,000 3 $75,000 + (25 × $500) Alternatively, we could calculate the incremental revenue and the incremental costs of the additional 2,500 units as follows: Incremental revenue $100 × 2,500 $250,000 Incremental direct manufacturing costs 7,500 $262,500 × 2,500 87,500 Incremental direct manufacturing costs $300,000 7,500 × 2,500 100,000 Incremental batch manufacturing costs $500 × 25 12,500 Total incremental costs 200,000 Total incremental operating income from accepting the special order $ 50,000 Award Plus should accept the one-time-only special order if it has no long-term implications because accepting the order increases Award Plus’ operating income by $50,000. If, however, accepting the special order would cause the regular customers to be dissatisfied or to demand lower prices, then Award Plus will have to trade off the $50,000
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gain from accepting the special order against the operating income it might lose from regular customers. 2. Award Plus has a capacity of 9,000 medals. Therefore, if it accepts the special one-time order of 2,500 medals, it can sell only 6,500 medals instead of the 7,500 medals that it currently sells to existing customers. That is, by accepting the special order, Award Plus must forgo sales of 1,000 medals to its regular customers. Alternatively, Award Plus can reject the special order and continue to sell 7,500 medals to its regular customers. Award Plus’ operating income from selling 6,500 medals to regular customers and 2,500 medals under one-time special order follow: Revenues (6,500 × $150) + (2,500 × $100) $1,225,000 Direct materials (6,500 × $35 1 ) + (2,500 × $35 1 ) 315,000 Direct manufacturing labor (6,500 × $40 2 ) +(2,500 × $40 2 ) 360,000 Batch manufacturing costs (130 3 × $500) + (25 × $500) 77,500 Fixed manufacturing costs 275,000 Fixed marketing costs 175,000 Total costs 1,202,500 Operating income $ 22,500 1 $35 = 7,500 $262,500 2 $40 = $300,000 7,500 3 Award Plus makes regular medals in batch sizes of 50. To produce 6,500 medals requires 130 (6,500 ÷ 50) batches. Accepting the special order will result in a decrease in operating income of
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ch11sol - CHAPTER 11 DECISION MAKING AND RELEVANT...

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