Question

FromZetherz Company produced and sold 50,000 units of product and is operating at 80% of plant capacity. Unit information about its product is as follows:

Sales Price

$68

Variable manufacturing cost

$42

	Fixed manufacturing cost ($600,000 ÷ 50,000)	12	54
	Profit per unit		$14

The company received a proposal from a Danish company to buy 10,000 units of FromZetherz Company's product for $49 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of FromZetherz Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.

Instructions
Prepare a schedule reflecting an incremental analysis of this proposal that indicates the effect the acceptance of this order might have on the company's income.

Answer 1

Statement showing calculation of Additional income from sales to Danish Co

	Per unit	Total amount (10,000 units)
Sales	$49	$490,000 (49*10,000)
Variable cost	$42	$420,000 (42*10,000)
Profit	$7	$70,000 (490,000-420,000)

Note:Fixed cost not relevant

Schedule showing incremental analysis of the proposal.

	Income before accepting order	Income after accepting order	Increase/(Decrease)
Sales	$3,400,000 (68*50,000)	$3,400,000 (68*50,000)	0
Variable cost	$2,100,000 (42*50,000)	$2,100,000 (42*50,000)	0
Fixed cost	$600,000	$600,000	0
Additional income from selling to danish company		$70,000	$70,000

Profit

$700,000

$770,000

$70,000

The income has increased by selling 10,000 units to danish company by $70,000 so order should be accepted.

Note:

1

The total capacity=50,000/.80

Total capacity=62,500

Company has excess capacity of 12,500 units so it can accept the order and no units production are lost.

2

Note that fixed cost is irrelevant cost for deciding selling 10,000 units as it is already incurred and will not affect decision making.

Hope it helps!!