Question

Max company makes plastic bottles for the coke bottling company. During the month of May Max produced $150,500 bottles for Coke operating at 60% capacity. Max company reported the following results of its operations:

Sales: $7,525,000

Cost of Goods Sold: $4,000,000

Selling, general and Adm. Expenses :$2,000,000

Net income: $1,525,000

Fixed costs for the period were cost of goods Sold $990,000 and selling General and Administration Expenses $43500

For the month of June, Max company has received a special order to produce $80,000 bottles for Pepsi Bottling Company. Variable Selling, General and Administrative Expenses would increase $2 per bottle because the special courier needed for shipping. Variable cost of Goods sold would decrease $0.50 per bottle because Pepsi would supply its own labels.

Fixed Cost of Goods sold would increase $1 per bottle because a special label placing machine would need to be rented for the month. Pepsi its willing to pay $37 per bottle.

What are the relevant revenues?

What are the relevant costs?

If the order is accepted, what is the overall impact on net income?

Should Max accept the special order?

What non-financial factors should Max consider in making its decision?

Answer 1

What are the relevant revenues?
Selling price for special order			$                      37
Multiply: Number of units for special order			80,000
Relevant revenues			$       2,960,000
What are the relevant costs?
		Cost of goods Sold	Selling, general and Adm.
Total Cost		$      4,000,000	$       2,000,000
Less: Fixed cost		$          990,000	$             43,500
Total variable cost		$      3,010,000	$       1,956,500
Divided by: Number of units		150,500	150,500
Variable cost per unit		$              20.00	$                13.00
Variable Cost of goods Sold per unit (20-0.50) (hint: Variable cost of Goods sold would decrease $0.50 per bottle because Pepsi would supply its own labels.)			$                19.50
Variable Selling, general and Adm. per unit (13+2) (Hint: Variable Selling, General and Administrative Expenses would increase $2 per bottle because the special courier needed for shipping. )			$                15.00
Increase in Fixed Cost of Goods sold per unit			$                  1.00
Relevant cost per unit			$                35.50
Relevant cost per unit			$                35.50
Multiply: Number of units for special order			80,000
Relevant Costs			$       2,840,000
If the order is accepted, what is the overall impact on net income?
Relevant revenues			$       2,960,000
Less: Relevant Costs			$       2,840,000
Overall impact on net income (Hint: Increase in net income)			$           120,000
Should Max accept the special order?
Max should accept the special order. (Hint: Increase in net income)
What non-financial factors should Max consider in making its decision?
Impact of special price to special order affect normal customer behavior.