Jones Products manufactures and sells to wholesalers approximately 400,000 packa
ID: 2590316 • Letter: J
Question
Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.97 per package. Annual costs for the production and sale of this quantity are shown in the table.
A new wholesaler has offered to buy 67,000 packages for $3.32 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional business reveals the following:
Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate.
30% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 70% of the annual overhead cost is variable with volume.
Complete the three-column comparative income statement that shows the following (Round your intermediate calculations and per unit cost answers to 2 decimals)
Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.97 per package. Annual costs for the production and sale of this quantity are shown in the table.
Explanation / Answer
Per Unit Amounts
Total
Normal Volume
New Business
Normal Volume
New Business
Combined
Sales
$3.97
$3.32
$1588000
$222440
$1810440
Variable costs;
Direct materials
$1.28
$1.28
$512000
$85760
$597760
Direct labor
$0.32
$0.48
$128000
$32160
$160160
Variable overhead
$0.672
$0.672
$268800
$45024
$313824
Total variable costs
$2.272
$2.432
$908800
$162944
$1071744
Fixed costs;
Fixed overhead
$0.288
Nil
$115200
Nil
$115200
Selling expense
$0.4
Nil
$160000
Nil
$160000
Administrative expense
$0.2675
$0.06
$107000
$4000
$111000
Total fixed costs
$0.9555
$0.06
$382200
$4000
$386200
Operating income
$0.7425
$0.828
$297000
$55476
$352496
Working Note:
1. As per question it is given that no additional selling expenses will be for new business offer. Hence combined total costs will be same as it is for normal volume.
2. Fixed overheads will not be for new business because these are fixed upto a limit of 500000 units.
Per Unit Amounts
Total
Normal Volume
New Business
Normal Volume
New Business
Combined
Sales
$3.97
$3.32
$1588000
$222440
$1810440
Variable costs;
Direct materials
$1.28
$1.28
$512000
$85760
$597760
Direct labor
$0.32
$0.48
$128000
$32160
$160160
Variable overhead
$0.672
$0.672
$268800
$45024
$313824
Total variable costs
$2.272
$2.432
$908800
$162944
$1071744
Fixed costs;
Fixed overhead
$0.288
Nil
$115200
Nil
$115200
Selling expense
$0.4
Nil
$160000
Nil
$160000
Administrative expense
$0.2675
$0.06
$107000
$4000
$111000
Total fixed costs
$0.9555
$0.06
$382200
$4000
$386200
Operating income
$0.7425
$0.828
$297000
$55476
$352496
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