Question

In: Accounting

Special Order VideoSecu produces wall mounts for flat panel television sets. Assume the forecasted income statement...

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

Solutions

Expert Solution

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.


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