Question

BuoyBuoy

manufactures flotation vests in

Atlanta comma GeorgiaAtlanta, Georgia.

Buoy'sBuoy's

contribution margin income statement for the most recent month contains the following​ data:

Buoy
Contribution Margin Income Statement (Variable Costing)
For Sales Volume of 31,000 Units
		Total
	Sales revenue	$434,000
	Less variable expenses:
	Variable manufacturing costs (DM, DL, Variable MOH)	93,000
	Variable operating expenses (selling and administrative)	108,000
	Contribution margin	$233,000
	Less fixed expenses:
	Fixed manufacturing overhead	$121,000
	Fixed operating expenses (selling and administrative)	95,000
	Operating income (loss)	$17,000

Requirement 1. Prepare an incremental analysis to determine whether

BuoyBuoy

should accept this special sales order. ​(Enter a​ "0" for any zero balances. Use parentheses or a minus sign to indicate a negative contribution margin​and/or a decrease in operating income from the special​ order.)

		Total Order
Incremental Analysis of Special Sales Order Decision	Per Unit	(5,100 units)
Revenue from special order
Less variable expense associated with the order:
Variable manufacturing costs
Contribution margin
Less: Additional fixed expenses associated with the order
Increase (decrease) in operating income from the special order

​Decision:

▼

Accept the special sales order.

Reject the special sales order.

Requirement 2. Identify​ long-term factors

BuoyBuoy

should consider in deciding whether to accept the special sales order.

In addition to determining the special​ order's effect on operating​ profits,

BuoyBuoy​'s

managers also should consider the​ following:

A.

How will

BuoyBuoy​'s

competitors​ react? Will they retaliate by cutting their prices and starting a price​ war?

B.

Will lowering the sale price tarnish

BuoyBuoy​'s

image as a quality​ brand?

C.

Will

BuoyBuoy​'s

other customers find out about the lower sale price

BuoyBuoy

accepted from

OvertonOverton​?

If​ so, will these other customers demand lower sale​ prices?

D.

All of the above.

E.

None of the above.

Answer 1

Requirement1:

		Total Order
Incremental Analysis of Special Sales Order Decision	Per Unit	(5,100 units)
Revenue from special order	14	71,100
Less variable expense associated with the order:	3	15,300
Variable manufacturing costs	3.4834	17,765
Contribution margin	7.5166	38,035
Less: Additional fixed expenses associated with the order	0	0
Increase in operating income from the special order		38,035

Accept this special sales order

Buoy should accept this special sales order because it will increase operating income/profit by $38,035. The operating loss of $17,000 can be recovered when 31,000 has been manufactured.

Requirement2:

Correct answer is E. None of the Above.

Explanation.When Special order is accepted it is assumed that the firm has enough idle capacity to handle the order without distrupting the regular customer. So, regular customers must be denied special offer.

It is also assumed that the special sale order is one time order for short run pricing decision to cover differential variable and fixed cost. But incase of long run, the prices must cover all costs from points A, B and C all should be taken into considerations.