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Analysis of differential revenues and costs -- special orderainclude the formula hereIncreased revenueDifferential costs:Selling:Per unit variable costUnits in special orderTotal variable costsFixed cost increment:Total volume required by special orderExtra volumeExtra costProfit/(loss) on special orderbC

Question

How do I do this?  See the screenshot for (a).

Total cost data follow for Glendale Manufacturing Company, which has a normal capacity per period of 8000 unitsof product that sell for $60 each.  For the foreseeable future, regular sales volume should continue to equal to normal capacity

Direct materials  $100,800
Direct labor $62,400
Variable manufacturing overhead $46,800
Fixed manufacturing overhead $38,400
Selling expense (note 2) $35,200
Adminstrative expense (fixed) $15,000
  $298,600

Notes:

1. Beyond normal capacity, fixed overhead costs increase $1,800 for each 500 units or fraction thereof until a maximum capacity of 10,000 units is reached.

2. Selling expenses consist of a 6% sales commission and shipping costs of 80 cents per unit.  Glendalepays only three-fourths of the regular sales commission on sales totaling 501 to 1000 units and only two-thirds the regular commission on sales totaling 1000 units or more.

Glendale's sales manager has received a special order for 1200 units from a large discount chain at a price of $36 each, FOB factory.  The controller's office has furnished the following additional cost data related to the special order:

1. Changes in the product's design will reduce direct materials costs $1.50 per unit

2. Special processing will add 20% to the per-unit direct labor costs.

3. Variable overhead will continue at the same proportion of direct labor costs.

4. Other costs should not be affected

 

Problems:

a. Present an analysis supporting a decision to accept or reject the special order. 

b. What is the lowest price Glendale could receive and still make a a $3600 profit before income taxes on the special order?

c. What general qualitative factors should Glendale consider?

Analysis of differential revenues and costs -- special order
a
include the formula here
Increased revenue
Differential costs:
Selling:
Per unit variable cost
Units in special order
Total variable costs
Fixed cost increment:
Total volume required by special order
Extra volume
Extra cost
Profit/(loss) on special order
b
C
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Image Transcriptionclose

Analysis of differential revenues and costs -- special order a include the formula here Increased revenue Differential costs: Selling: Per unit variable cost Units in special order Total variable costs Fixed cost increment: Total volume required by special order Extra volume Extra cost Profit/(loss) on special order b C

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check_circleAnswer
Step 1

Differential analysis is an analysis conducted to decide whether an offer should be accepted or rejected. If there is a profit after conducting the analysis, the offer should be accepted. If there is a loss, the offer should be rejected.

Step 2

Working Notes:

Total variable cost= No. of units × cost per unit

                              = 1,200 × $28.92

                              = $34,704

Contribution margin= Total sales – variable cost

                                 = $43,200 - $34,704

                                        = $8,496

Fixed cost= $1,800 × (1,200 ÷ 500)

                 = $1,800 × 2.4

                 = $1,800 × 3

                = $5,400

Here, 2.4 is rounded off to 3 as it is given in the question that fixed cost increases for 500 units or fraction part thereof.

 

The offer should be accepted, as there is a profit of $3,096.

a. Calculation of profit is done as follows:
Number Cost
Cost (S)
Cost for
Particulars
Increase/
of units
per unit Decrease
special
order
$11.10
Direct material
Direct labor
$100,800
$62,400
-1.5
8.000
8,000
$12.60
$7.80
$1.56 (20% S9.36
of $7.80)
S1.17 (20% S7.02
of $5.85)
$46,800
$5.85
Variable overhead
8,000
Differential analysis
Differential revenue (1,200 x 36)
Differential cost
Direct material
Direct labor
Variable overhead
Selling
Selling Commission (36x6%x
(2+3))
Shipping expenses
Total variable cost
Contribution margin
Less: fixed cost
Extra cost (1,800 x 3)
Profit on
Per unit ($) Total ($)
43,200
$11.10
$9.36
$7.02
$1.44
0
S34,704
S8,496
-S28.92
$5,400
S3,096
special order
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a. Calculation of profit is done as follows: Number Cost Cost (S) Cost for Particulars Increase/ of units per unit Decrease special order $11.10 Direct material Direct labor $100,800 $62,400 -1.5 8.000 8,000 $12.60 $7.80 $1.56 (20% S9.36 of $7.80) S1.17 (20% S7.02 of $5.85) $46,800 $5.85 Variable overhead 8,000 Differential analysis Differential revenue (1,200 x 36) Differential cost Direct material Direct labor Variable overhead Selling Selling Commission (36x6%x (2+3)) Shipping expenses Total variable cost Contribution margin Less: fixed cost Extra cost (1,800 x 3) Profit on Per unit ($) Total ($) 43,200 $11.10 $9.36 $7.02 $1.44 0 S34,704 S8,496 -S28.92 $5,400 S3,096 special order

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Step 3

b. Lowest sales price will be ...

Contribution margin = 38,496x100
S43, 200
=0.1967
Sales Fixed cost +Profit(desired)
Contribution margin ratio
5,400+3,600
1967
S45,745
Salesprice (perunit)= S45,745
1,200
S38.13
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Contribution margin = 38,496x100 S43, 200 =0.1967 Sales Fixed cost +Profit(desired) Contribution margin ratio 5,400+3,600 1967 S45,745 Salesprice (perunit)= S45,745 1,200 S38.13

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