Question
In: Accounting
Pro Sports Inc. manufactures basketballs for professional basketball associations. For the first six months of 2016,...
Pro Sports Inc. manufactures basketballs for professional basketball associations. For the first six months of 2016, the company reported the following operating results while operating at 90% of plant capacity:
Amount Sales $4,500.00 at $50.00 per unit
Cost of goods sold 3,150,000 at $35.00 per unit
Selling and administrative expenses 360,000 at $4.00 per unit
Net income 990,000 at $11.00 per unit
Fixed costs for the period were: cost of goods sold $900,000, and
selling and administrative expenses $162,000.
In July, normally a slack manufacturing month, Pro Sports receives
a special order for 9,000 basketballs at $30 each from the Italian
Basketball Association. Accepting the order would increase variable
selling and adminstrative expenses $0.50 per unit because of
shipping costs but would not increase fixed costs and expenses.
Instructions:
a) Prepare an incremental analysis for the special order.
b) Should Pro Sports Inc. accept the special order? Explain your
anser.
c) What is the minimum selling price on the special order to
produce net income of $5.00 per ball?
d) What nonfinancial factors should management consider in making
its decision?
Solutions
Expert Solution
a)
| Units produced = 4,500,000/ 50 = 90000 units | |||||
| Particulars | Total | Fixed | Variable | VC / unit (Cost / 90000) |
|
| Cost of goods sold | 3,150,000 | 900,000 | 2,250,000 | 25.00 | |
| Selling and admin | 360,000 | 162,000 | 198,000 | 2.20 | |
| Incremental cost / unit = Variable COGS / unit + Selling and admin / unit = 25 + 2.2 + 0.5 = 27.7 | |||||
b) Yes, Pro sports should accept the offer, as incremental cost is $27.7 whereas revenue will be $30 each unit. This will lead to $2.3 of extra contribution.
c) The minimum selling price to produce a net income of $ 5 = Inc cost + $5 = 27.7 + 5 = 32.7
d) The management needs to consider the production capacity, payment terms with the customer, credibility of the customer, etc.
ekkarill92 answered 1 year agoRelated Solutions
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