XYZ manufactures tote bags. The forecasted income statement for the year before any special orders included sales of $4,000,000 (sales price is $10 per unit.) Manufacturing cost of goods sold is anticipated to be $3,200,000. Selling expenses are expected to be $300,000, and operating income is projected at $500,000. Fixed costs included in these forecasted amounts are $1,200,000 for manufacturing cost of goods sold and $100,000 for selling expenses. Murphy is offering a special order to buy 50,000 tote bags for $7.50 each. There will be no additional selling expenses, and sufficient capacity exists to manufacture the extra tote bags.
Requirements: Prepare an incremental analysis schedule to demonstrate what amount operating income would increase or decrease as a result of accepting the special order.
Hint: think differences between accepting the order or not.
Answer:
First we need to calculate Per Unit cost as follow
| Particular | Before Accepting Special order |
Per Unit |
| Sales | 400,000 | 400,000 |
| Sales price | 10 | 10 |
| Sales | 4,000,000 | 10 |
| Manufacturing cost of goods | 3,200,000 | 8 |
| Selling Expnses | 300,000 | 0.75 |
| Operating Income | 500,000 | 1.25 |
| Fixed costs | ||
| for manufacturing cost of goods sold |
1,200,000 | |
| selling expenses | 100,000 |
Now we will calculate incremental analysis as follow
XYZ limited
Iincremental analysis schedule
| Particular | Before Accepting Special order |
Accepting Special order |
Increase/ Decrease |
| Sales | 400,000 | 50,000 | 50,000 |
| Sales price | 10 | 7.5 | |
| Sales | 4,000,000 | 375,000 | 375,000 |
| Manufacturing cost of goods | 3,200,000 | 400000 | 400000 |
| Selling Expnses | 300,000 | 0 | 0 |
| Operating Income | 500,000 | -25,000 | -25,000 |
| Fixed costs | |||
| for manufacturing cost of goods sold |
1,200,000 | 0 | 0 |
| selling expenses | 100,000 | 0 | 0 |
Comments :
Company should not accept special order because it has operating loss of $ 25,000 in accepting a special order
