Question

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:

a. Direct materials costs are 100% variable.
b. 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.
c. 20% of the normal annual overhead costs are fixed at any production level from 250,000 to 400,000 units. The remaining 80% of the annual overhead cost is variable with volume.
d. Accepting the new business would involve no additional selling expenses.
e. Accepting the new business would increase administrative expenses by a $3,000 fixed amount.

Answer 1

67,000 packages at $3.32 each = $222,440

relevant costs:

direct materials = $1.28 per unit

direct labor is 50% higher due to overtime pay = $0.32 x 1.5 = $0.48 per unit

overhead is 20% fixed and 80% variable = $0.768 per unit

administrative expenses increase = $3,000

total relevant costs

A) NET INCOME WITHOUT SPECIAL ORDER:

total revenue $1,568,000

- cost of goods sold ($1,024,000)

• direct materials $512,000
• direct labor $128,000
• overhead $384,000

gross profit $544,000

- S&A expenses ($267,000)

• selling $160,000
• administrative $107,000

Net income $277,000

B) CHANGE IN NET INCOME WITH SPECIAL ORDER

relevant revenue $222,440

- cost of goods sold ($169,376)

• direct materials $85,760
• direct labor $32,160
• overhead $51,456

gross profit $53,064

- S&A expenses ($3,000)

• selling $0
• administrative $3,000

Net income $50,064

C) COMBINED NET INCOME WITH SPECIAL ORDER:

total revenue $1,790,440

- cost of goods sold ($1,193,376)

• direct materials $597,760
• direct labor $160,160
• overhead $435,456

gross profit $597,064

- S&A expenses ($270,000)

• selling $160,000
• administrative $110,000

Combined net income $327,064