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 (78,100 units) $7,107,100 Cost of goods sold 4,978,875 Gross profit 2,128,225 Operating expenses 781,000 Net income $1,347,225 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 4,000 fireplaces at $61 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.

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 15,500 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 $66,650. The special design also requires the purchase of a part that costs $5,300 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 Langston’s Landscape CompanyBenson Building and Supply

Answer 1

Incremental analysis for the special order :

Particulars	78,100 units	82,100 units	Difference
sales	7,107,100	7351100	244,000
COGS (variable)	39,83,100	41,87,100	(204,000)
COGS (fixed)	995,775	995,775	0
Gross profit	2,128,225	2,168,225	40,000
Operating expenses (variable)	546,700	574,700 + 6400	34,400
Operating expenses (fixed)	234,300	234,300	0
Net Profit	1,347,225	1,352,825	5,600

Company should accept the order as it results in increase in net profit by $5,600

(ii)

Particulars	78,100 units	93,600 units	Difference
sales	7,107,100	8,114,600	1,007,500
COGS (variable)	3,983,100	4,773,600 + 66, 650 + 5,300	(862,450)
COGS (fixed)	995,775	995,775	0
Gross profit	2,128,225	2,273,275	145,050
Operating expenses (variable)	546,700	655,200	108,500
Operating expenses (fixed)	234,300	234,300	0
Net Profit	1,347,225	1,383,775	36,550

The net profit ($36,550) is higher in alternative two i.e the order from Benson Building & Supply for 15,500 fireplaces as compared to net profit (5,600) from alternative one i.e order for 4,000 fireplaces at $61 each from Langston’s Landscape Company. Therefore, company should accept the special order from Benson.