Question

Jones Products manufactures and sells to wholesalers approximately 200,000 packages per year of underwater markers at $3.94 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials	$	256,000
Direct labor		64,000
Overhead		192,000
Selling expenses		80,000
Administrative expenses		53,000
Total costs and expenses	$	645,000

A new wholesaler has offered to buy 33,000 packages for $3.38 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ 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 150,000 to 300,000 units. The remaining 70% of the annual overhead cost is variable with volume.
• Accepting the new business would involve no additional selling expenses.
• Accepting the new business would increase administrative expenses by a $3,000 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

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	per unit (Cost/200,000)		Without Special Order	Only Special Order	Combined
Sales		200,000*$3.94	$                              788,000	$                       111,540	$     899,540
		33,000*$3.38
Less: Costs and expenses
Direct Material	$                                             1.28	33,000*$1.28	$                              256,000	$                          42,240	$     298,240
Direct Labor	$                                             0.32	33,000*($0.32*1.50)	$                                 64,000	$                          15,840	$       79,840
Variable Ovrheads	$                                             0.67	70% Variable	$                              134,400	$                          22,176	$     156,576
Fixed Overheads		30% Fixed	$                                 57,600	$                                   -	$       57,600
Selling and expense			$                                 80,000	$                                   -	$       80,000
Administrative Expesne			$                                 53,000	$                            3,000	$       56,000
Total Cost and Expenses			$                              645,000	$                          83,256	$     728,256
Net Income			$                              143,000	$                          28,284	$     171,284