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?

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.

Step 3

b. Lowest sales price will be ...

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