Question

Camino Company manufactures designer to-go coffee cups. Each line of coffee cups is endorsed by a high-profile celebrity and designed with special elements selected by the celebrity. During the most recent year, Camino Company had the following operating results while operating at 75 percent (60,000 units) of its capacity:

Sales revenue	$	840,000
Cost of goods sold		322,500
Gross profit	$	517,500
Operating expenses		15,000
Net operating income	$	502,500

Camino’s cost of goods sold and operating expenses are 80 percent variable and 20 percent fixed. Camino has received an offer from a professional wrestling association to design a coffee cup endorsed by its biggest star and produce 16,000 cups for $8 each (total $128,000). These cups would be sold at wrestling matches throughout the United States. Acceptance of the order would require a $48,000 endorsement fee to the wrestling star, but no other increases in fixed operating expenses.

Required:
1. Complete the incremental analysis of the special order in the table provided below. (Enter per unit answers to 2 decimal places.)



2. Should Camino accept this special order?

	Yes
	No

3. If Camino were operating at full capacity, what price would Camino require for the special order?

Answer 1

1.

STATEMENT OF INCREMENTAL ANALYSIS
	Current		Proposed	Incremental
	Per unit	Total
Activity - units	60000		76000	16000
Sales	14.00	840000	968000	128000
Variable costs:
Cost of goods sold	4.30	258000	326800	68800
Operating Expenses	0.50	12000	38000	26000
Total Variable costs	4.80	270000	364800	94800
Contribution margin	9.20	570000	603200	33200
Fixed Expenses:
Cost of goods sold		64500	64500	0
Operating Expenses		3000	3000	0
Total Fixed Expenses		67500	67500	0
Net operating Income		502500	535700	33200

2. Camrino oshould acept this special offer.

3. If Camrino were operating at full capacity the price required by Camrino will be = $10.04.

Working:

Contribution margin per unit	9.20
Per unit fixed costs
Cost of goods sold (64,500 / 80,000)	0.81
Operating Expenses(3,000 / 80,000)	0.04
Total per unit fixed costs	0.84
Price to be accepted	10.04