Moonbeam Company manufactures toasters. For the first 8-months of 2017, the company reported the following operating results while operating at 75% of plant capacity:

Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $935,000

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Moonbeam receives a special order for 21,600 toasters at $8.12 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,100 of shipping costs but no increase in fixed costs.

Required:
a. Prepare an incremental analysis for the special order.
b. Should Moonbeam accept the special order? Why or why not?

Answer:

Moonbeam Company

a. Incremental Analysis:

Sales revenue:

Units of toasters (21,600 at $8.12)   $175,392

Variable costs (21,600 * $7.12)           153,792

Shipping costs                                         3,100

Total incremental costs                   $156,892

Incremental net income                    $18,500

b. Moonbeam should accept the special order.  It has the required capacity to deliver the additional toasters.  It will generate an incremental income of $18,500, which is better than nothing.  

Explanation:

a) Data and Calculations:

Sales (350,000 units) $4,375,000

Cost of goods sold       2,600,000

Gross profit                     1,775,000

Operating expenses        840,000

Net income                    $935,000

Operating capacity = 75%

Current sales = 350,000

Plant capacity = 466,667 units (350,000/75%)

                                                  Total           Per Unit

Sales (350,000 units)           $4,375,000    $12.50

Variable cost of goods sold = 1,820,000 ($2,600,000 * 70%)

Variable operating expense =  672,000 ($840,000 * 80%)

Total variable costs =           $2,492,000    $7.12

Net income =                         $1,883,000

Special Order:

Incremental Sales revenue

Units of toasters (21,600 at $8.12)   $175,392

Variable costs (21,600 * $7.12)           153,792

Shipping costs                                         3,100

Total incremental costs                   $156,892

Incremental net income                    $18,500    

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