Question

Aerosmith Industries manufactures basketballs. The budgeted income statement for the year, before any special orders, is as follows:

                                                                                                  Amount                                      Per Unit

Sales                                                                                  $4,000,000                                        $10.00

Cost of goods sold                                                            3,200,000                                             8.00

Gross Profit                                                                           800,000                                             2.00

Selling expenses                                                                   300,000                                               .75

Operating income                                                              $500,000                                          $1.25

Fixed costs included in the above data are $1,200,000 in cost of goods sold and $100,000 in selling expenses.

A special order offering to buy 50,000 basketballs for $7.50 each was made to Aerosmith. There will be no additional selling expenses if the order is accepted. Assuming Aerosmith has enough capacity to manufacture 50,000 more basketballs, by what amount would operating income be increased or decreased as a result of accepting the special order? $ _____________________

Answer 1

Income will increase by $125,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (50,000 x $7.50)	$ 375,000
Less: Total Additional cost due to acceptance of offer	$ 250,000
Financial Advantage	$ 125,000

.

Calculation of Additional Cost of Order
	Per Unit	Total
Variable cost of goods sold	$                      5.00	$ 250,000

.

Sales revenue	$ 4,000,000.00
Divided by : Sales price	$                10.00
Units sole	400000

.

Total cost of good sold	$      3,200,000.00
Less: Fixed cost of goods sold	$      1,200,000.00
Variable cost of goods sold	$      2,000,000.00
Variable cost of goods sold per unit (2000000/400000)	$                      5.00