Question

Jones Products manufactures and sells to wholesalers approximately 100,000 packages per year of underwater markers at $4.00 per package. Annual costs for the production and sale of this quantity are shown in the table. Direct materials $ 128,000 Direct labor 32,000 Overhead 96,000 Selling expenses 40,000 Administrative expenses 27,000 Total costs and expenses $ 323,000 A new wholesaler has offered to buy 17,000 packages for $3.36 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’s sales through its normal channels. A study of the costs of this additional business reveals the following: Direct materials costs are 100% variable. Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate. 30% of the normal annual overhead costs are fixed at any production level from 50,000 to 200,000 units. The remaining 70% of the annual overhead costs are variable with volume. Accepting the new business would involve no additional selling expenses. Accepting the new business would increase administrative expenses by a $2,000 fixed amount. Required: Complete the three-column comparative income statement that shows the following. (Round your intermediate calculations and per unit cost answers to 3 decimals.) 1. Annual operating income without the special order. 2. Annual operating income received from the new business only. 3. Combined annual operating income from normal business and the new business.

Answer 1

			Per unit amounts		Total
			Normal	New	Normal	New	Combined
			Volume	Business	Volume	Business
Sales			4	3.36	400000	57120	457120
Variable costs:
Direct Materials			1.28	1.28	128000	21760	149760
Direct Labor			0.32	0.48	32000	8160	40160
Variable Overhead			0.67	0.67	67200	11424	78624
Total Variable costs			2.27	2.43	227200	41344	268544
Contribution margin			1.73	0.93	172800	15776	188576
Fixed costs:
Fixed overhead					28800	0	28800
Administrative expenses					27,000	2,000	29,000
Selling expenses					40,000	0	40,000
Total fixed costs					95800	2000	97800
Operating income					77000	13776	90776