In: Accounting
Special Order
VideoSecu produces wall mounts for flat panel television sets. Assume the forecasted income statement for next year is as follows:
VideoSecu Budgeted Income Statement For the Year |
|
---|---|
Sales ($28 per unit) | $5,600,000 |
Cost of good sold ($19 per unit) | (3,800,000) |
Gross profit | 1,800,000 |
Selling expenses ($5 per unit) | (1,000,000) |
Net income | $800,000 |
Additional Information
(1) Of the production costs and selling expenses, $1,520,000 and
$750,000, respectively, are fixed.
(2) VideoSecu received a special order from a hospital supply
company offering to buy 10,000 wall mounts for $15. If it accepts
the order, there will be no additional selling expenses, and there
is currently sufficient excess capacity to fill the order. The
company's sales manager argues for rejecting the order because "we
are not in the business of paying $19 to make a product to sell for
$15."
Do you think the company should accept the special order?
Compute the contribution per unit and total contribution for the special order.
Contribution per unit. Note: Round answer to two decimal
places.
$Answer
Total contribution
$Answer
Sales = $5,600,000
Selling price per unit = $28
Number of units sold = Sales/ Selling price per unit
= 5,600,000/28
= 200,000
Cost of goods sold = $3,800,000
Fixed cost of goods sold = $1,520,000
Variable cost of goods sold =Cost of goods sold-Fixed cost of goods sold
= 3,800,000-1,520,000
= $2,280,000
Variable cost of goods sold per unit = Variable cost of goods sold/ Number of units sold
= 2,280,000/200,000
= $11.4
Selling price in the special order = $15
Special order size = 10,000 units
Selling expense for 200,000 units = $1,000,000
Fixed selling expense = $750,000
Variable selling expense = Selling expense - Fixed selling expense
= 1,000,000-750,000
= $250,000
Variable selling expense per unit = Variable selling expense/ Number of units sold
= 250,000/200,000
= $1.25
Variable cost per unit = Variable cost of goods sold + Variable selling expense per unit
= 11.4+1.25
= $12.65
Contribution marign per unit = Selling price per unit- Variable cost per unit
= 15-12.65
= $2.35
Total contribution margin from the special order = Special order size x Contribution margin per unit for the special order
= 10,000 x 2.35
= $23,500
Special order should be accepted.