Majestic Company (MC) produces and sells 80,000 boxes of specialty foods each ye

Question

Majestic Company (MC) produces and sells 80,000 boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual costs: Cost item Total costs Variable production costs $400,000 Fixed production costs 480,000 Variable selling costs 320,000 Fixed selling and administrative costs 200,000 Total costs $1,400,000 Majestic normally charges $25 per box. A new distributor has offered to purchase 8,000 boxes at a special price of $22 per box. Majestic will incur additional packaging costs of $1 per box to complete this order. REQUIRED: 1. Suppose Majestic has surplus capacity to produce 8,000 more boxes. What will be the effect on Majestic's income if it accepts this order? 2. Suppose that instead of having surplus capacity to produce 8,000 more boxes, Majestic has surplus capacity to produce only 3,000 more boxes. What will be the effect on Majestic's income if it accepts the new order for 8,000 boxes? Majestic Company (MC) produces and sells 80,000 boxes of specialty foods each year. Each box contains the same assortment of food. The company has computed the following annual costs: Cost item Total costs Variable production costs $400,000 Fixed production costs 480,000 Variable selling costs 320,000 Fixed selling and administrative costs 200,000 Total costs $1,400,000 Majestic normally charges $25 per box. A new distributor has offered to purchase 8,000 boxes at a special price of $22 per box. Majestic will incur additional packaging costs of $1 per box to complete this order. REQUIRED: 1. Suppose Majestic has surplus capacity to produce 8,000 more boxes. What will be the effect on Majestic's income if it accepts this order? 2. Suppose that instead of having surplus capacity to produce 8,000 more boxes, Majestic has surplus capacity to produce only 3,000 more boxes. What will be the effect on Majestic's income if it accepts the new order for 8,000 boxes?

Explanation / Answer

Answer 1            

Incremental Sales from 8000 boxes 176000

Less                                      

                Variable Production costs             40000   

                Variable selling cost                        32000   

                Additional Packaging                      8000      

                                Total Variable cost 80000

Income from additional 8000 units 96000

Majestic's income will increase by $ 96000 if it accepts this order.

Answer 2                                                                            

Sale from 8000 units 176000

Less                                      

                Variable Production costs(8000*5)                                                           40000   

                Variable selling cost 32000   

                Additional Packaging 8000      

                Opportunity cost of 5000 units (Existing contribution* 5000) 80000   

(See working note)

Total variable cost 160000

                Income from Special order in case of 3000 surplus capacity 16000

Majestic's income will increase by $ 16000 if it accepts this order.

Working Note:

Existing contribution per unit     

                Sale price                                                                             25          

                Less Variable Production cost(400000/80000) 5             

                Less Variable selling cost(320000/80000)                4             

                Contribution per Unit 16          

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