Question

Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.92 per package. Annual costs for the production and sale of this quantity are shown in the table. Direct materials $ 512,000 Direct labor 128,000 Overhead 384,000 Selling expenses 160,000 Administrative expenses 107,000 Total costs and expenses $ 1,291,000 A new wholesaler has offered to buy 67,000 packages for $3.30 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional business reveals the following: Direct materials costs are 100% variable. Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate. 25% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 75% of the annual overhead cost is variable with volume. Accepting the new business would involve no additional selling expenses. Accepting the new business would increase administrative expenses by a $5,000 fixed amount. Required: Complete the three-column comparative income statement that shows the following (Round your intermediate calculations and per unit cost answers to 3 decimals) 1. Annual operating income without the special order. 2. Annual operating income received from the new business only. 3. Combined annual operating income from normal business and the new business.

Answer 1

Ans- The three-column comparative income statement:-

	Per Unit Amounts		Total
	Normal Volume	New Business	Normal Volume	New Business	Combined
Units			400,000	67,000	467,000
Sales	$3.92	$3.30	$1,568,000	$221,100	$1,789,100
Variable Cost
Direct material	$1.28	$1.28	$512,000	$85,760	$597,760
Direct labour (50% increase in labour due to new business)	$0.32	$0.48 ($0.32+$0.32*50/100)	$128,000	$32,160	$160,160
Variable overhead (75 % is variable)	$0.72	$0.72	$288,000	$48,240	$336,240
Total variable cost (Rounded off)	$2.32	$2.48	$928,000	$166,160	$1,094,160
Contribution (Sales-Variable Cost)			$640,000	$54,940	$694,940
Fixed Cost
Fixed overhead (25% is fixed within the range of 350,000-500,000 units so no incremental cost in new business)			$96,000 ($384,000*25%)		$96,000
Administrative Expenses			$107,000	$5,000	$112,000
Selling Expenses			$160,000		$160,000
Total Fixed Cost			$363,000	$5,000	$368,000
Operating Income (Contribution-Total Fixed Cost)			$277,000	$49,940	$326,940

Thus,

1-Annual operating income without the special order-$277,000

2-Annual operating income received from the new business only-$49,940

3- Combined annual opearting income from normal business and the new business-$326,940

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