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XYZ manufactures tote bags. The forecasted income statement for the year before

ID: 2484906 • Letter: X

Question

XYZ manufactures tote bags. The forecasted income statement for the year before any special orders included sales of $4,000,000 (sales price is $10 per unit.) Manufacturing cost of goods sold is anticipated to be $3,200,000. Selling expenses are expected to be $300,000, and operating income is projected at $500,000. Fixed costs included in these forecasted amounts are $1,200,000 for manufacturing cost of goods sold and $100,000 for selling expenses. Rayco is offering a special order to buy 50,000 tote bags for $7.50 each. There will be no additional selling expenses, and sufficient capacity exists to manufacture the extra tote bags.

Requirements: Prepare an incremental analysis schedule to demonstrate what amount operating income would increase or decrease as a result of accepting the special order.

Explanation / Answer

Incremental analysis

Calculation of amount operating income that would increase or decrease as a result of accepting the special order:

Before Accepting offer

After Accepting offer

Increase (Decrease) in Operating income

Sales

$                          4,000,000

$                     4,375,000

$                                          375,000

(400000 units *$10)

(400000 units *$10) + (50000 Units * $7.50)

Variable Manufacturing cost of goods sold

$                          2,000,000

$                     2,250,000

$                                       (250,000)

(3200000-1200000)

($2000000/400000 Units )*450000 Units

Fixed Manufacturing cost of goods sold

$                          1,200,000

$                     1,200,000

$                                                     -  

Variable Selling expenses

$                             200,000

$                         225,000

$                                          (25,000)

(300000-100000)

($200000/400000 Units )*450000 Units

Fixed Selling expenses

$                             100,000

$                         100,000

$                                                     -  

Operating income

$                             500,000

$                         600,000

$                                          100,000

Hence accepting the offer would increase the operating income by $100,000.

Incremental analysis

Calculation of amount operating income that would increase or decrease as a result of accepting the special order:

Before Accepting offer

After Accepting offer

Increase (Decrease) in Operating income

Sales

$                          4,000,000

$                     4,375,000

$                                          375,000

(400000 units *$10)

(400000 units *$10) + (50000 Units * $7.50)

Variable Manufacturing cost of goods sold

$                          2,000,000

$                     2,250,000

$                                       (250,000)

(3200000-1200000)

($2000000/400000 Units )*450000 Units

Fixed Manufacturing cost of goods sold

$                          1,200,000

$                     1,200,000

$                                                     -  

Variable Selling expenses

$                             200,000

$                         225,000

$                                          (25,000)

(300000-100000)

($200000/400000 Units )*450000 Units

Fixed Selling expenses

$                             100,000

$                         100,000

$                                                     -  

Operating income

$                             500,000

$                         600,000

$                                          100,000

Hence accepting the offer would increase the operating income by $100,000.