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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Decision on accepting additional business

A manager of Varden Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf halls at a price of $22 per dozen. The variable cost to manufacture a dozen golf balls is $18 per dozen. The full cost is $25 per dozen. Varden has a normal selling price of $35 per dozen. Varden’s plant has just enough excess capacity on the second shift to make the overseas order.

What are some considerations in accepting or rejecting this order?

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Enlist: The things to be considered by the manager of Company VSG before deciding to accept or reject the order.

Explanation

Contribution Margin: Contribution Margin refers to the margin of profit expected by the company. The contribution margin is the difference between the selling price and the cost of the product.

The contribution margin per dozen would $4($22 - $18) on the special order, as the total variable cost for producing a dozen would be $18 and the new offer price is $22.

The following things need to be considered by the manager of Company VSG before deciding to accept or reject the order.

  • The scope of business expansion in the market overseas...

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