Question

Challenge Exercise 7-1 (Part Level Submission)

Conklan Company manufactures outdoor fireplaces. For the first 9 months of 2020, the company reported the following operating results while operating at 80% of plant capacity:

Sales (80,300 units)		$7,307,300
Cost of goods sold		5,219,500
Gross profit		2,087,800
Operating expenses		803,000
Net income		$1,284,800

Cost of goods sold was 80% variable and 20% fixed; operating expenses were 70% variable and 30% fixed.

In October, Conklan Company receives a special order for 3,800 fireplaces at $62 each from Langston’s Landscape Company. Acceptance of the order would result in an additional $6,400 of shipping costs but no increase in fixed operating expenses.

(c)

Before Conklan could give Langston’s Landscape Company an answer, they received a special order from Benson Building & Supply for 14,300 fireplaces. Benson is willing to pay $65 per fireplace but they want a special design imbedded into the fireplace that increases cost of goods sold by $67,210. The special design also requires the purchase of a part that costs $4,800 and will have no future use for Conklan Company. Benson Building & Supply will pick up the fireplaces so no shipping costs are involved. Due to capacity limitations, Conklan cannot accept both special orders. Which order should be accepted? Document your decision by preparing an incremental analysis for Benson’s order. (Enter loss using either a negative sign preceding the number e.g. -2,945 or parentheses e.g. (2,945).)

		Reject order		Accept order		Net Income Increase (Decrease)
Revenues		$		$		$
Costs
Cost of Goods Sold
Operating Expenses
Unique part
Net Income		$		$		$

Conklan should accept the order from Benson Building and SupplyLangston’s Landscape Company .

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Answer 1

Solution - Variable COGS ( cost of goods sold ) = 80% * $ 5,219,500 = $ 4,175,600

Variable COGS per unit = $ 4,175,600 / 80300 units = $ 52

Variable operating expenses = 70 % * $ 803,000 = $ 562,100

Variable operating expense per unit = $ 562,100 / 80300 units = $ 7

Note - Separate tables of incremental analysis of special order from two companies have been prepared since such format was mentioned at the end of the question.Altenatively, single table for special order from two companies can also be prepared.

Note - Fixed portion of COGS and operating expenses would not be considered for incremental analysis because conklan is already incurring these expenses and with acceptance of any of the special order these fixed expeneses would not increase until specifically mentioned.Also, there is availability of excess capacity.

Alternative 1 - langston's landscape company -

   Reject order    Accept order       Net income(increase/decrease)

Sales (3800 * $62) 0 $ 235,600 $ 235,600

Variable COGS ( 3800 * 52 ) 0    ( $ 197,600 ) ( $ 197,600 )

Variable operating expenses (3800* $7) 0 ( $ 26,600 )    ( $ 26,600 )

Shipping costs 0 ( $ 6,400 ) ( $ 6,400 )

Net income (net of all above)    0 $ 5,000 $ 5,000

Alternative 2 - Benson building & supply -

Reject order      Accept order       Net income(increase/decrease)

Sales ( 14,300 * $ 65) 0        $ 929,500 $ 929,500

Variable COGS [(14300 * $52) + $ 67,210 ] 0        ( $ 810,810 ) ( $ 810,810 )

Variable operating expenses(14300*$7)      0 ( $ 100,100 ) ( $ 100,100 )

Cost of Part for special design 0 ( $ 4,800 ) ( $ 4,800 )

Net income (net of all above) 0   $ 13,790    $ 13,790

From comparison between net income of special order from two companies ( $ 5000 and $ 13,790), we can conclude that conklan company should accept order of BENSON BUILDING AND SUPPLY as net income from it is higher (by $ 8790 ).