Shanghai Exports, LTD produces wall mounts for flat panel television sets. The f
ID: 2523430 • Letter: S
Question
Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2012 is as follows:
Additional Information (1) Of the production costs and selling expenses, $800,000 and $100,000, respectively, are fixed. (2) Shanghai Exports, LTD received a special order from a hospital supply company offering to buy 12,500 wall mounts for $30. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $36 to make a product to sell for $30."
Question: Do you think the company should accept the special order? Should the decision be based only on the profitability of the sale, or are there other issues that Soni should consider? Explain.
Bugdgeted Income Statement
For the Year 2012 Sales ($ 44 per unit) $ 4,400,000 Cost of good sold ($ 32 per unit) (3,600,000) Gross profit 800,000 Selling expenses ($ 3 per unit) (300,000) Net income $ 500,000
Explanation / Answer
If Special Order is Accepted
Additional sales-$30*12500=$375000
(-) COGS-$28(see note)*12500=$350,000
Gross Profit=$25,000
(-)selling expenses-nil (given no add selling expenses would be incurred)
so,total benefit to the company $25,000
yes,the company should accept the special order because net benefit to the company will increase by $25,000.
the decision should be based on the relevant costing only and we will make use of cost accounting principles in this.
Note-we have ignored the fixed cost completely because the fixed cost will be incurred even if the order is not accepted so it is not a relevant cost while making a decision regarding a special order.
no of units-$ 4,400,000/$ 44 per unit
-$1,00,000
COGS(Ignoring the fixed part as it is irrelevant)-$3,600,000-$800,000
-$2,800,000
so per unit-$2,800,000/1,00,000
-$28 per unit
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