Problem 20-1A (Part Level Submission) ThreePoint Sports Inc. manufactures basket
ID: 2560886 • Letter: P
Question
Problem 20-1A (Part Level Submission) ThreePoint Sports Inc. manufactures basketballs for the Women's National Basketball Association (WNBA). For the first 6 months of 2017, the company reported the following operating results while operating at 80% of plant capacity and producing 119,900 units. Sales Cost of goods sold Selling and administrative expenses Net income $4,676,100 3,527,059 482,601 Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $244,000 In July, normally a slack manufacturing month, ThreePoint Sports receives a special order for 10,000 basketballs at $29 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.73 per unit because of shipping costs but would not increase fixed costs and expenses. (GBA). noe inrease dos ande ensecExplanation / Answer
Solution:
Question is related on the decision making based on relevant cost whether to accept or reject the special order.
Relevant Cost is the cost which will be incurred in future and different under each alternative course of action. The following costs are considered as relevant cost:
- Direct material cost
- Direct labor cost
- Variable manufacturing overhead
- Variable Cost of Goods Sold
- Variable selling and administrative expenses
The above costs are the variable cost which will vary with the production volume. Hence these costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.
Irrelevant cost is the costs which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company accept or reject the order. Hence it is treated as IRRELEVANT COST.
Part 1 --- Incremental Analysis for The Special Order
Incremental Analysis for the Special Order
Reject Order
Accept order
Net Income Increase (Decrease)
Revenues
0
$290,000
$290,000
Cost of goods sold (Refer Note 1)
0
($214,100)
($214,100)
Selling and administrative Expenses (Refer Note 2)
0
($27,200)
($27,200)
Net Income
0
$48,700
$48,700
Note 1 – Cost of Goods Sold related to Special Order
Variable Cost of Goods Sold = Total COGS – Fixed COGS = $3,527,059 – 960,000 = $2,567,059
Per Unit Variable Cost of Goods Sold = Total Variable COGS / Units Produced = $2,567,059 / 119,900 Units
= $21.41 per unit
Variable Cost of Goods Sold for Special Order = 10,000 Units x $21.41 = $214,100
Note 2 – Selling and administrative Expenses related to Special Order
Variable S&A Expense = Total S&A Expenses – Fixed S&A Expenses = 482,601 – 244,000 = 238,601
Per Unit S&A Expenses = Total Variable S&A 238,601 / Units Produced 119,900 Units = $1.99 per unit
Total Variable cost of S&A Expenses for special order = 10,000 Units x ($1.99 + Increase $0.73)
= $27,200
Part 2 --- Yes, the order should be accepted since the special order is profitable.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Incremental Analysis for the Special Order
Reject Order
Accept order
Net Income Increase (Decrease)
Revenues
0
$290,000
$290,000
Cost of goods sold (Refer Note 1)
0
($214,100)
($214,100)
Selling and administrative Expenses (Refer Note 2)
0
($27,200)
($27,200)
Net Income
0
$48,700
$48,700
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