ACE MY INSTRUCTOR FULL SCREEN PRINTER VERSION BACK NEXT Exercise 7-3 Moonbeam Co

Question

ACE MY INSTRUCTOR FULL SCREEN PRINTER VERSION BACK NEXT Exercise 7-3 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: Sales (350,400 units) $4,372,000 Cost of goods sold Gross profit Operating expenses 840,400 Net income 2,603,000 1,769,000 $928,600 Cost of goods sold was 65% variable and 35% fixed; operating expenses were 75% variable and 25% fixed. r, Moonbeam Company receives a special order for 20,100 toasters at $7.59 each from Luna Company of Cludad Juarez. Acceptance of the order would result in an additional $3,100 of shipping costs but no increase in fixed costs.

Explanation / Answer

In case of decision making, Unavoidable Fixed costs does not affect decision. Entire Fixed costs have been recovered at 75% Capacity.So.Fixed costs will be same in each alternative case. (a) Incremental Analysis for the special order: Reject Order Accept Order Net Income Increase (Decrease) Revenues $       43,72,000 $     45,24,559 $       1,52,559 Cost of goods sold $       26,03,000 $     27,00,055 $           97,055 Operating Expenses $          8,40,400 $       8,79,656 $           39,256 Net Income $          9,28,600 $       9,44,848 $           16,248 (b) Moonbeam Company should accept the special order. Working: i. Reject Order: In case order is rejected, Existing Income will be for company. ii. Accept Order: Units can be sold at balancing Capacity = 350,400*(25%/75%) =              1,16,800 Speecial order is for 20,100 units. It means that special order can be fulfilled by utilising remaining unutilised capacity. At 350,400, iii. Total cost of goods sold = $       26,03,000 Variable cost of goods sold (a) = $     26,03,000 x 65% = $       16,91,950 Total Units sold (b)              3,50,400 Variable cost per Units (a)/(b)                  4.8286 iv. Operating Expenses in total $          8,40,400 Variable operating Expenses (a) $       8,40,400 x 75% = $          6,30,300 Total Units sold (b)              3,50,400 Variable cost per Units (a) /(b)                  1.7988 v. So, variable costs for special order will be calculated as follow: Variable cost of goods sold =              20,100 x      4.8286 =                  97,055 Variable operating Expenses =              20,100 x      1.7988 =                  36,156 vi. Sales Revenue for Special order =              20,100 x $       7.59 =              1,52,559 vii. After Acceptence of order, Cost of goods sold =        26,03,000 +      97,055 =            27,00,055 Operating Expenses =           8,40,400 +      36,156 + $                3,100 = 8,79,656 (shipping costs) Sales Revenue =        43,72,000 + 1,52,559 =            45,24,559 viii. Reject Order Accept Order Net Income Increase (Decrease) Revenues $       43,72,000 $     45,24,559 $       1,52,559 Cost of goods sold $       26,03,000 $     27,00,055 $           97,055 Gross profit $       17,69,000 $     18,24,504 $           55,504 Operating Expenses $          8,40,400 $       8,79,656 $           39,256 Net Income $          9,28,600 $       9,44,848 $           16,248

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