Exercise 26-3 Moonbeam Company manufactures toasters. For the first 8 months of

Question

Exercise 26-3

Moonbeam Company manufactures toasters. For the first 8 months of 2017, the company reported the following operating results while operating at 75% of plant capacity:

Cost of goods sold was 66% variable and 34% fixed; operating expenses were 76% variable and 24% fixed.

In September, Moonbeam Company receives a special order for 22,800 toasters at $7.60 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,000 of shipping costs but no increase in fixed costs.

(a)

Prepare an incremental analysis for the special order. (Round computations for per unit cost to 4 decimal places, e.g. 15.2500 and all other computations and final answers to the nearest whole dollar, e.g. 5,725. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

(b)

Should Moonbeam Company accept the special order?

Sales (349,300 units) $4,377,000 Cost of goods sold 2,606,000 Gross profit 1,771,000 Operating expenses 839,100 Net income $931,900

Explanation / Answer

a) Incremental analysis for the special order:

b. Yes, Moonbeam Company should accept the special order as net income would increase by $ ( 948,181 - 931,801) = $ 16,380

Workings :

Variable component of cost of goods sold = $ 2,606,000 x 66% = $ 1,719,960

Variable manufacturing cost per unit = $ 1,719,960 / 349,300 = $ 4.924 per unit

Variable component of operating expenses = $ 839,100 x 76% = $ 637,716

Variable operating expenses per unit = $ 637,716 / 349,300 = $ 1.826

Total variable cost per unit = $ 4.924 +$ 1.826 = $ 6.75

Reject special order Accept Sales $ 4,377,000 $ 4,550,280 Variable costs $ 2,357,775 $ 2,514,675 Contribution margin $ 2,019,225 $ 2,035,605 Fixed cost Manufacturing $ 886,040 $ 886,040 Operating $ 201,384 $ 201,384 Net income $ 931,801 $ 948,181

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