Shouldcordellaccepttheorder drhusseinkhasharmeh

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Unformatted text preview: sharmeh Special Sales Order Accepting the special order: 1. would not affect Cordell’s regular business in any way (sufficient capacity). 2. would not raise any antitrust issues concerning price discrimination (no negative effect). 3. would not affect total fixed costs. 4. would not require any additional variable selling and administrative expenses. 5. would use some otherwise idle manufacturing capacity. Should Cordell accept the order? Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Special Sales Order Only variable manufacturing costs are affected by this particular order, at a rate of $24 per unit ($24,000,000 ÷ 1,000,000 units). All other variable costs and all fixed costs are unaffected and thus irrelevant. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Special Sales Order Special order sales price/unit $26 Increase in manufacturing costs/unit 24 Additional operating profit/unit $2 Based on the preceding analysis, Based should Cordell accept the order? should $2 × 100,000 = $200,000 additional profit Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Special Sales Order Cordell Company Contribution Form of the Income Statement For the Year Ended December 31, 2007 (000) Without Effect of special order special order 1,000,000 units Total Per Unit Sales (at $40 each) $40,000,000 $2,600,000 $26 Less: Variable expenses Manufacturing $24,000,000 $2,400,000 $24 Selling and administrative 2,200,000 Total variable expenses 26,200,000 $2,400,000 Contribution margin $13,800,000 $ 200,000 Less: Fixed expenses Manufacturing $ 6,000,000 Selling and administrative 5,800,000 Total fixed expenses 11,800,000 Operating income $ 2,000,000 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh With special order 1,100,000 units $42,600,000 $26,400,000 2,200,000 $28,600,000 $14,000,000 $6,000,000 5,800,000 11,800,000 $2,200,000 It is shown form the analysis above that special order affects only It variable manufacturing costs at a rate of $24/unit. All other variable costs and all fixed costs are unaffected and thus, irrelevant, so manager may ignore them in the analysis. Notice that the total operating income will increase by $200,000 if special order is accepted. The dec...
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This document was uploaded on 03/02/2014 for the course ACCOUNTING 221 at Alaska Pacific University.

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