Question

Moonbeam Company manufactures toasters. For the first 8 months of 2017, the company reported the following operating results while operating at 75% of plant capacity:

Sales (349,900 units)		$4,373,000
Cost of goods sold		2,602,000
Gross profit		1,771,000
Operating expenses		839,800
Net income		$931,200

Cost of goods sold was 74% variable and 26% fixed; operating expenses were 84% variable and 16% fixed.

In September, Moonbeam Company receives a special order for 20,800 toasters at $8.48 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,000 of shipping costs but no increase in fixed costs.

(a)

Prepare an incremental analysis for the special order. (Round computations for per unit cost to 4 decimal places, e.g. 15.2567 and all other computations and final answers to the nearest whole dollar, e.g. 5,725. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Reject Order		Accept Order		Net Income Increase (Decrease)
Revenues		$		$		$
Cost of goods sold
Operating expenses
Net income		$		$		$

(b)

Should Moonbeam Company accept the special order?

Moonbeam Company should rejectshould accept the special order.

Exercise 21-5 Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 54% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.81 and $4.77, respectively. Normal production is 25,100 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.75 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $44,800 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. (a) Prepare an incremental analysis to decide if Pottery Ranch should buy the finials. (Round answers to 0 decimal places, e.g. 1,225. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)	(b) Should Pottery Ranch buy the finials?	(c) Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $48,014?
		Make		Buy		Net Income Increase (Decrease)
Direct materials		$		$		$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost		$		$		$
YesNo , Pottery Ranch should buynot buy the finials.
YesNo , income would increasedecrease by $

Answer 1

1.

(a)

	Reject Order	Accept Order	Net income (decrease)
Revenues		$176,384 (20,800 × $8.48)	$176,384
Cost of goods sold (see below-note-1)		($114,460)(20,800 × $5.5029)	($114,460)
Operating expenses (see below-note-2)		($44,935)	($44,935)
Net income		$16,989	$16,989

Note-1) Variable cost of good sold = $2,602,000 ×74%

Variable cost of good sold = $1,925,480

Variable cost of good sold per unit = $1,925,480/349,900

Variable cost of good sold per unit = $5.5029

Note-2) Variable operating expense = $839,800 ×84%

Variable operating expense = $705,432

Variable operating cost per unit = $705,432/349,900

Variable operating cost per unit = $2.0161

Operating expense = (20,800 × $2.0161) + $3,000

Operating expense = $41,935 + $3,000

Operating expense = 44,935

(b)

Yes, Moonbeam company should accept the order as the net income is increased.

2.

(a)

	Make	Buy	Difference
Direct Materials	$95,631 (25,100 × $3.81)		$95,631
Direct labor	$119,727 (25,100 × $4.77)		$119,727
Variable overhead costs	$64,653 ($119,727 ×54%)		$64,653
Fixed manufacturing costs	$44,800	$44,800	0
Purchase Price		$320,025 (25,100 × $12.75)	($320,025)
Total annual costs	$324,811	$364,825	($40,014)

(b)

No, Pottery Ranch should not buy the finials.

(c)

Yes, income will increase by $8,000 ($48,014 - $40,014)