Question

Moonbeam Company manufactures toasters. For the first 8-months of 2017, the company reported the following operating results while operating at 75% of plant capacity:

Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $935,000

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Moonbeam receives a special order for 21,600 toasters at $8.12 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,100 of shipping costs but no increase in fixed costs.

Required:
a. Prepare an incremental analysis for the special order.
b. Should Moonbeam accept the special order? Why or why not?

Answer 1

Moonbeam Company

a. Incremental Analysis:

Sales revenue:

Units of toasters (21,600 at $8.12) $175,392

Variable costs (21,600 * $7.12) 153,792

Shipping costs 3,100

Total incremental costs $156,892

Incremental net income $18,500

b. Moonbeam should accept the special order. It has the required capacity to deliver the additional toasters. It will generate an incremental income of $18,500, which is better than nothing.

Step-by-step explanation:

a) Data and Calculations:

Sales (350,000 units) $4,375,000

Cost of goods sold 2,600,000

Gross profit 1,775,000

Operating expenses 840,000

Net income $935,000

Operating capacity = 75%

Current sales = 350,000

Plant capacity = 466,667 units (350,000/75%)

Total Per Unit

Sales (350,000 units) $4,375,000 $12.50

Variable cost of goods sold = 1,820,000 ($2,600,000 * 70%)

Variable operating expense = 672,000 ($840,000 * 80%)

Total variable costs = $2,492,000 $7.12

Net income = $1,883,000

Special Order:

Incremental Sales revenue

Units of toasters (21,600 at $8.12) $175,392

Variable costs (21,600 * $7.12) 153,792

Shipping costs 3,100

Total incremental costs $156,892

Incremental net income $18,500