Common costs wrongful allocation of unavoidable

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Unformatted text preview: product line appear unprofitable Special Orders: Accept vs. Reject Jet Corporation makes a single product whose normal selling price is $20 per unit. A customer offers to make a one-time purchase in bulk at 3,000 units for $10 per unit. Jet is currently producing 5,000 units, and operating at an idle capacity of 5,000 units. Special Orders: Accept vs. Reject Jet Corporation Contribution Income Statement Revenue (5,000 × $20) $ 100,000 Variable costs: Direct materials $ 20,000 Direct labor 5,000 Manufacturing overhead 10,000 Marketing costs 5,000 Total variable costs 40,000 Contribution margin 60,000 Fixed costs: Manufacturing overhead $ 28,000 Marketing costs 20,000 Total fixed costs 48,000 Net operating income $ 12,000 Special Orders: Accept vs. Reject Variable Costs (20,000 + 5,000 + 10,000) / 5000 units = $7 per unit. Increase in revenue (3,000 × $10) Increase in costs (3,000 × $7 variable cost) Increase in net income Decision: Accept order $ 30,000 $ 21,000 $ 9,000 Joint Products: Process further vs. Sell Joint costs are incurred up to the split-off point Joint Input Common Production Process Split-Off Point For example, in the petroleum refining Separate industry, a large Final Oil Processing Sale number of products are extracted from crude oil, including Final Gasoline gasoline, jet fuel, Sale home heating oil, lubricants, asphalt, Separate Final Chemicals and various organic Processing chemicals. Sale Segment Income Statement Digital Watches Sales $ 500,000 Less: variable e...
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