FromZetherz Company produced a
FromZetherz Company produced and sold 50,000 units of productand is operating at 80% of plant capacity. Unit information aboutits product is as follows:
|
Sales Price |
$68 |
|
Variable manufacturing cost |
$42 |
|
Fixed manufacturing cost ($600,000 ÷ 50,000) |
12 |
54 |
|
|
Profit per unit |
$14 |
The company received a proposal from a Danish company to buy 10,000units of FromZetherz Company’s product for $49 per unit. This is aone-time only order and acceptance of this proposal will not affectthe company’s regular sales. The president of FromZetherz Companyis reluctant to accept the proposal because he is concerned thatthe company will lose money on the special order.InstructionsPrepare a schedule reflecting an incremental analysis of thisproposal that indicates the effect the acceptance of this ordermight have on the company’s income.
Answer:
Statement showing calculation of Additional income from sales toDanish Co
| Per unit | Total amount (10,000 units) | |
| Sales | $49 | $490,000 (49*10,000) |
| Variable cost | $42 | $420,000 (42*10,000) |
| Profit | $7 | $70,000 (490,000-420,000) |
Note:Fixed cost not relevant
Schedule showing incremental analysis of the proposal.
| Income before accepting order | Income after accepting order | Increase/(Decrease) | |
| Sales | $3,400,000 (68*50,000) | $3,400,000 (68*50,000) | 0 |
| Variable cost | $2,100,000 (42*50,000) | $2,100,000 (42*50,000) | 0 |
| Fixed cost | $600,000 | $600,000 | 0 |
| Additional income from selling to danishcompany | $70,000 | $70,000 |
| Profit | $700,000 | $770,000 | $70,000 |
The income has increased by selling 10,000 units to danishcompany by $70,000 so order should be accepted.
Note:
1
The total capacity=50,000/.80
Total capacity=62,500
Company has excess capacity of 12,500 units so it can accept theorder and no units production are lost.
2
Note that fixed cost is irrelevant cost for deciding selling10,000 units as it is already incurred and will not affect decisionmaking.
Hope it helps!!
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
