Question

Company produces and sells 90,000 boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual costs: Cost Item Total Costs Variable production costs $630,000 Fixed production costs 470,000 Variable selling costs 180,000 Fixed selling and administrative costs 170,000 Total costs $1,450,000 Mendenhall normally charges $ 30 per box. A new distributor has offered to purchase 9,000 boxes at a special price of $ 27 per box. Mendenhall will incur additional packaging costs of $ 4 per box to complete this order. Requirements (a) Suppose Mendenhall has surplus capacity to produce 9,000 more boxes. What will be the effect on Mendenhall 's income if it accepts this order? (b) Suppose that instead of having surplus capacity to produce 9,000 more boxes, Mendenhall has surplus capacity to produce only 3,500 more boxes. What will be the effect on Mendenhall 's income if it accepts the new order for 9,000 boxes? Requirement (a) Suppose Mendenhall has surplus capacity to produce 9,000 more boxes. What will be the effect on Mendenhall 's income if it accepts this order? Select the items that are relevant if the order is accepted, then calculate the effect on income. (Only complete the necessary answer boxes. Use parentheses or a minus sign for a net decrease in income.) in income

Answer 1

(a) It has surplus capacity to produce 9,000 more boxes:

The Contribution, Variable Cost analysis of 90,000 boxes are as follows:

From the above table, the variable cost per box is arrived at $9. If the company has additional capacity, it has to only recover the variable cost. Since the new distributor has offered a special price of $27 per box, the company would get additional contribution of $18 per box for entire 9,000 boxes.

Additional contribution = $18 x 9,000 = $162,000

If Mendenhall accepts the special order, its income would increase by $162,000.

(b) It has additional capacity to produce only 3,500 boxes.

In this case, for the additional 5,500 boxes, there would be opportunity cost of $21 as if 5,500 boxes are sold to outside customers they would gain $21 contribution.

Effect on Net Income = $18 x 3,500 + ($18 - $21) x 5,500

= $63,000 - $16,500

= $46,500

In this case the Net Income would increase by $46,500