ACBilco Manufacturing produces and sells oil filters for $3.30 each. A retailer

Question

ACBilco Manufacturing produces and sells oil filters for $3.30 each. A retailer has offered to purchase 25,000 oil filters for $1.40 per filter. Of the total manufacturing cost per filter of $2.10, $1.20 is the variable manufacturing cost per filter. For this special order, ACBilco would have to buy a special stamping machine that costs $9,500 to mark the customer's logo on the special-order oil filters. The machine would be scrapped when the special order is complete. This special order would use manufacturing capacity that would otherwise be idle. No variable nonmanufacturing costs would be incurred by the special order. Regular sales would not be affected by the special order Would you recommend that ACBilco accept the special order under these conditions? Complete the following incremental analysis to help you make your recommendation. (Use parentheses or a minus sign to indicate a decrease in operating income from the special order.) Total Order Incremental Analysis of Special Sales Order Decision Per Unit (25,000 units) Revenue from special order Less variable expense associated with the order: Contribution margin Increase (decrease) in operating income from the special order ACBilco accept the special sales order because it will operating income.

Explanation / Answer

Incremental analysis :

ACBilco should not accept the special sales order because it will decrease operating income.

Per unit Total order (25000 units) Revenue from special order 1.40 35000 Less: Variable expense associated with the order -1.20 -30000 Contribution margin 0.20 5000 Less: Special machine -9500 Increase (decrease) in operating income from the special order -4500

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