Special order decision and considerations (Learning Objective 3) Coastal Safety

Question

Special order decision and considerations (Learning Objective 3) Coastal Safety manufactures flotation vests in Miami, Florida. Coastal Safety's contribution margin income statement for the most recent month contains the following data: P8-49A Coastal Safety Contribution Margin Income Statement (Variable Costing) For Sales Volume of 32,000 Units 2 4 6 Sales revenue 8 Variable manufacturing costs (DM, DL,Variable MOH) Per unit 480,000 ess variable expenses: Variable operating expenses (selling and administrative) Contribution margin Less fixed expenses: 160,000 112,000 208,000 10 11 12 13 14 Fixed manufacturing overhead Fixed operating expenses (selling and administrative 126,000 91,000 9,000) Operating income (loss) Suppose Dazzle Cruiselines wants to buy 4,600 vests from Coastal Safety. Acceptance of the order will not require any variable selling and administrative expenses. The special order will not affect fixed expenses. The Coastal Safety plant has enough unused capacity to manufacture the additional vests. Dazzle Cruiselines has offered $7 per vest, which is below the normal sale price of $15.

Explanation / Answer

Incremental analysis: Incremental revennue (4600*7) 32200 Less: Incremental cost: Variable Manufacturing cost (160000/32000*4600) 23000 Incremental income 9200 Hence, Special order must be accepted. The other factors to be considered: * Price war may be taken place between competitor due to reduced price accepted. *Regular customer will also demand the lower price. * Loss of regular sales due to frequent orders from such customer.

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