ThreePoint Sports Inc. manufactures basketballs for the Women\'s National Basket

Question

ThreePoint Sports Inc. manufactures basketballs for the Women's National Basketball Association (WNBA). For the first 6 months of 2017, the company reported the following operating results while operating at 80% of plant capacity and producing 120,100 units. Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $241,000. In July, normally a slack manufacturing month, ThreePoint Sports receives a special order for 10,000 basketballs at $28 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.77 per unit because of shipping costs but would not increase fixed costs and expenses. (a) Prepare an incremental analysis for the special order. Should ThreePoint Sports Inc. accept the special order?

Explanation / Answer

Operaing at 80% capacity, the company produces 120,100 units.

Therefore, the full capacity is 120,100/80% = 150,125 units.

So, even if the new order for 10,000units are accepted, the production of existing units will not suffer.

Analysis of Cost per Unit

Revenue & Expense ($)

[A]

Fixed Costs ($)

[B]

Variable Costs ($)

[D]=[A]-[B]

No. of Units (Nos.)

[E]

Per Unit Revenue/ Variable Cost ($)

If new project is accepted,

Selling Price = $28

Sales Revenue = $28x10,000 = $280,000

COGS = $21.02x10,000 = $210,200

Selling & Admn Expenses = ($1.73 + $0.77)x10,000 = $25,000 (Increase in transportaion cost $0.77 added)

Net incremental Revenue = 280,000 - 210,200 - 25,000 = $44,800

B. The company should accept the offer as it generates incremental revenue of $44,800.

Particulars

Revenue & Expense ($)

[A]

Fixed Costs ($)

[B]

Variable Costs ($)

[D]=[A]-[B]

No. of Units (Nos.)

[E]

Per Unit Revenue/ Variable Cost ($)

Sales 4,804,000 120,100 40 Cost of Goods Sold 3,484,502 960,000 2,524,502 120,100 21.02 Selling & Administrative Expense 448,773 241,000 207,773 120,100 1.73

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