Lispell Co. manufactures in-line skates that sell for $128 a pair. The company i
ID: 2456454 • Letter: L
Question
Lispell Co. manufactures in-line skates that sell for $128 a pair. The company is currently operating at capacity, 2,000 pairs. A special order from a foreign distributor for 400 pairs of skates at $120 a pair has just been received. In order to accept this order, Lispell Co. would have to give up 400 pairs of its regular sales. However, there would be no sales commission incurred on the order. Shown below are the current costs of operation: Direct materials $48 Direct labor 12 Variable overhead 4 Fixed overhead 5 ($10,000 2,000 pairs) Variable selling and administrative 8 (sales commissions) Fixed selling and administrative 4 ($8,000 2,000 pairs) a. What costs are relevant to this decision? (3 points) b. Provide an incremental analysis to be used in determining whether or not the order should be accepted. (7 points)
Explanation / Answer
Solution :
a. What costs are relevant to this decision
all cost remains same except there is no variable selling & administrative expense
b. incremental analysis
Increase/decraese
sales (400 x 8)
-3200
DIRECT MATERIAL
0
DIRECT LABOR
0
VARIABLE OVERHEAD
0
FIXED OVERHAED
0
Variable selling and administrative (400 x 8)
-3200
Fixed selling and administrative
0
NET INCREASE/DECREASE
0
There is no change in income hence the decision is indifferent between accept or not.
a. What costs are relevant to this decision
all cost remains same except there is no variable selling & administrative expense
b. incremental analysis
Increase/decraese
sales (400 x 8)
-3200
DIRECT MATERIAL
0
DIRECT LABOR
0
VARIABLE OVERHEAD
0
FIXED OVERHAED
0
Variable selling and administrative (400 x 8)
-3200
Fixed selling and administrative
0
NET INCREASE/DECREASE
0
There is no change in income hence the decision is indifferent between accept or not.
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