Question

Sneakers Incorporated designs and manufactures fashion sneakers. For the coming year, the company scheduled production of 50,000 sneakers. Budgeted costs for this product are as follows: Unit Costs Total (50,000 units) Variable manufacturing costs $40 $2,000,000 Variable selling expenses 15 750,000 Fixed manufacturing costs 12 600,000 Fixed operating expenses 10 500,000 Total costs and expenses $77 $3,850,000 The management of Sneakers is considering a special order from Discount Kicks for an additional 20,000 sneakers. These sneakers would carry the Discount Kicks label, rather than the Sneakers Inc. label. In all other responds, they would be identical to the regular Sneakers Inc. fashion sneakers. Although Sneaker Inc. regularly sells its sneakers to retail stores at a price of $180 each, Discount Kicks has offered to pay only $45 per sneaker. However, because no sales commissions would be involved with this special offer, Sneaker Inc. will incur variables selling expenses of only $10 per units on these sales rather than the $15 it normally incurs. Accepting the order would cause no change in the company’s fixed manufacturing cost or fixed operating cost. Sneaker Inc. has enough plant capacity to product 70,000 sneakers per year. A. Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on Sneaker Inc. operating income.

Answer 1

Net loss $100,000

Step-by-step explanation:

The relevant cost for decision to accept the special order are

I Incremental Revenue from the special order

2. incremental variable cost

Note that whether or not the special order is accepted the fixed manufacturing and fixed operating expenses of would be incurred either way. Therefore , they are not relevant for the decision

Variable cost cost= 40 +10= 50

Sales revenue from the special order $

(45 × 20,000) 900000

Variable cost of the special order (50× 20,000) (1,000,000 )

Net loss 100,000