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.
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
