Question

Challenge Exercise 7-1 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 (68,300 units) $6,283,600 Cost of goods sold 4,354,125 Gross profit 1,929,475 Operating expenses 683,000 Net income $1,246,475 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 3,600 fireplaces at $61 each from Langston’s Landscape Company. Acceptance of the order would result in an additional $6,700 of shipping costs but no increase in fixed operating expenses.

Prepare an incremental analysis for the special 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    Shipping Expenses Net Income $ $ $

Should Conklan Company accept the special order? Why or why not? YesNo , its income is higherlowersame with this order.

Before Conklan could give Langston’s Landscape Company an answer, they received a special order from Benson Building & Supply for 15,400 fireplaces. Benson is willing to pay $64 per fireplace but they want a special design imbedded into the fireplace that increases cost of goods sold by $67,760. The special design also requires the purchase of a part that costs $4,700 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 .

Answer 1

Particulars	Units	Amount	Variable cost element(TC*VC%)	Fixed cost element(TC-VC)	variable cost Per unit(VC/Units)	Fixed cost(%)	Variable cost(%)
Sales(@80%)	68300	6283600	NA	NA
Cost of Goods sold	68300	4354125	3483300	870825	51	20	80
Gross profit		1929475
Operating exp	68300	683000	478100	204900	7	30	70
net income		1246475
Particulars	Operating Percentage	Units	Remarks
Production	80	68300
Production	100	85375
Spare capacity	20	17075
Note: If 68300 units can be produced at 80% then 85375 units can be produced at 100% capacity
1)
Statement of Incremental analysis
Particulars	Units	Amount per unit	Amount Total	Remarks
Sales	3600	61	219600
-Cost of Goods sold	3600	51	183600	VC per unit is calculated in above table
Gross profit			36000
Operating exp	3600	7	25200	VC per unit is calculated in above table
Shipping charges			6700
net income			4100
Conclusion: The order shall be accepted since the profit from the new order is $ 4100. and production of additional units does not affect the fixed cost. Only variable cost is increased for the additional units produced.
2)
Particulars	Units	Amount per unit	Amount Total	Remarks
Sales	15400	64	985600
(Cost of Goods sold)	15400	51	-853160	(15400*51)+67760
Gross profit			132440
(Operating exp)	15400	7	-107800
(Other expenses)			-4700	Purchase of a part
net income			19940
Conclusion: If only one order is to be accepted(Since there is Production capacity bottleneck) from the two special orders then, Benson Building's order shall be accepted since the Profit is $19940, compared to Landston's profit of $ 4100

TC-Total cost

VC-Variable

FC-Fixed Cost