roblem 25-48 Analysis of income effects f additional business Windmire Company m

Question

roblem 25-48 Analysis of income effects f additional business Windmire Company manufactures and sells to local wholesalers approximately at a sales price of $4 per unit. Monthly costs for the production 300.000 units per month and sale of this quantity follow Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses $384000 96,000 288,000 120000 80,000 $968,000 A new out-of-state distributor has offered to buy 50.000 units next month for $3.44 each. These units would be marketed in other states and would not affect Windmire's sales through its normal chan study of the costs of this new business reveals the following: Direct materials costs are 100% variable. Per unit direct labor costs for the additional units would be 50% higher than normal because their pro- duction would require overtime pay at 1% their normal rate to meet the distributor's deadline. Twenty-five percent of the normal annual overhead costs are fixed at any production level from 250,000 to 400,000 units. The remaining 75% is variable with volume. ? Accepting the new business would involve no additional selling expenses. .Accepting the new business would increase administrative expenses by a $4,000 fixed amount. Required Prepare a three-column comparative income statement that shows the following: 1. Monthly operating income without the special order (column 1) 2. Monthly operating income received from the new business only (column 2) Operating income 3. Combined monthly operating income from normal business and the new business (column 3)

Explanation / Answer

1

Working notes:

The per unit cost of variable expenses is as follows:

Direct material = 384000 / 300000 = $1.28

Direct labor = 96000 / 300000 = $0.32

DIrect labour rate for special order = 0.32*1.5 = $0.48

variable overhead = 216000 / 300000 = $0.72

Operating income without special order New business operating income Total operating income Sales unit                                       3,00,000                                  50,000                 3,50,000 Sale price $4 $3.44 Sale revenue $12,00,000 $1,72,000 $13,72,000 Less: operating expenses Direct material $3,84,000 $64,000 $4,48,000 Direct labor $96,000 $24,000 $1,20,000 Overhead $2,88,000 $36,000 $3,24,000 Selling expenses $1,20,000 $0 $1,20,000 Adminitrative expenses $80,000 $4,000 $84,000 Total expenses $9,68,000 $1,28,000 $10,96,000 Operating income $2,32,000 $44,000 $2,76,000

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