Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $2.10 per unit. Bluebird currently produces and sells 75,000 units at $6.10 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler’s name and would not affect Bluebird’s sales through its normal channels. Production costs for these units are $3.45 per unit, which includes $1.80 variable cost and $1.65 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Answer 1

A	B	C	D	E	F	G	H
2
3		Company's normal production	75000
4		Capacity	93750	=D3/80%
5		Units manufacturing Costs	Cost per Unit	Total Cost
6		Variable Cost	$1.80
7		Fixed Selling Expenses	$1.65	$123,750
8		Total costs	$3.45
9
10
11		Without special order:
12		Number of units to be sold to regular customers	75000
13		Price per unit	$6.10
14
15		With special order:
16		Number of units sold to special order	15000
17		Number of units to be sold to regular customers	75000
18		Price per unit for special Order	$2.10
19		Price per unit for normal Order	$6.10
20
21
22
23			Without Special Order	With Special Order
24				Regular	Special Order	Total
25		Revenue	$457,500	$457,500	$31,500	$489,000
26		Variable Manufacturing cost	$135,000	$135,000	$27,000	$162,000
27		Contribution Margin	$322,500	$322,500	$4,500	$327,000
28		Fixed Manufacturing cost	$123,750			$123,750
29		Income	$198,750			$203,250
30
31		Increase in Net income after accepting the special order	$4,500	=G29-D29
32
33		Thus operating income will increase if special order is accepted.
34		Therefore special order should be accepted.
35

Formula sheet

A	B	C	D	E	F	G	H
2
3		Company's normal production	75000
4		Capacity	=D3/80%	=D3/80%
5		Units manufacturing Costs	Cost per Unit	Total Cost
6		Variable Cost	1.8
7		Fixed Selling Expenses	1.65	=D3*D7
8		Total costs	=SUM(D6:D7)
9
10
11		Without special order:
12		Number of units to be sold to regular customers	=D3
13		Price per unit	6.1
14
15		With special order:
16		Number of units sold to special order	15000
17		Number of units to be sold to regular customers	=MIN(D4-D16,D12)
18		Price per unit for special Order	2.1
19		Price per unit for normal Order	=D13
20
21
22
23			Without Special Order	With Special Order
24				Regular	Special Order	Total
25		Revenue	=D12*D13	=D17*D19	=D16*D18	=E25+F25
26		Variable Manufacturing cost	=D6*D12	=D6*D17	=D6*D16	=E26+F26
27		Contribution Margin	=D25-D26	=E25-E26	=F25-F26	=E27+F27
28		Fixed Manufacturing cost	=$E$7			=D28
29		Income	=D27-D28			=G27-G28
30
31		Increase in Net income after accepting the special order	=G29-D29	=G29-D29
32
33		Thus operating income will increase if special order is accepted.
34		Therefore special order should be accepted.
35