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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Decision on accepting additional business
Madison Industries Inc. has an annual plant capacity of 800.000 units, and current production is 650,000 units. Monthly fixed costs are $1,200,000 and variable costs are $36 per unit. The present selling price is $50 per unit. The company received an offer from Story Mills Company for 125,000 units of the product at $41 each. Story Mills Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Madison Industries Inc.
a.Prepare a differential analysis report for the proposed sale to Story Mills Company.
b.Briefly explain the reason why accepting this additional business will increase operating income.
c.What is the minimum price per unit that would produce a contribution margin?

To determine

(a)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To Prepare:

The differential analysis report for the proposed sale.

Explanation

Total capacity of the company is 800,000 units. Company produces 650,000 in a year.

Company received an offer for 125,000 units at $41 each.

So, the differential analysis report for the project is:

    ParticularAmount
    Total differential revenue from accepting the offer
      (125,000×$41
To determine

(b)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To Describe:

The reason for accepting the offer.

To determine

(c)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To find out:

The minimum price of the product.

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