ACTG2020_Week5 2014 Ch12CMD (1)

Lo 2 opportunity cost an opportunity cost is the

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Unformatted text preview: ing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the formal accounts of an organization. How would this concept potentially relate to the Essex Company? LO 2 Key Terms and Concepts A special order is a one-time order that is not considered part of the company’s normal ongoing business. When analyzing a special order, only the incremental costs and benefits are relevant. LO 2 Special Orders Jet, Inc. makes a single product whose normal selling price is $20 per unit. A foreign distributor offers to purchase 3,000 units for $10 per unit. This is a one-time order that would not affect the company’s regular business. Annual capacity is 10,000 units, but Jet, Inc. is currently producing and selling only 5,000 units. Should Jet accept the offer? LO 2 Special Orders Jet, Inc. Contribution Income Statement Revenue (5,000 × $20) $ 100,000 V ariable costs: Direct materials $ 20,000 Direct labour 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 LO 2 Special Orders If Jet accepts the special order, the incremental revenue will exceed the incremental costs. In other words, net operating income will increase by $6,000. Accept order! Increase in revenue (3,000 × $10...
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