(a) & (b) ThreePoint Sports Inc. manufactures basketballs for the Women’s Nation
ID: 2458951 • Letter: #
Question
(a) & (b)
ThreePoint Sports Inc. manufactures basketballs for the Women’s National Basketball Association (WNBA). For the first 6 months of 2017, the company reported the following operating results while operating at 80% of plant capacity and producing 119,400 units. Amount Sales $4,537,200 Cost of goods sold 3,570,084 Selling and administrative expenses 487,442 Net income $479,674Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $257,000.
In July, normally a slack manufacturing month, ThreePoint Sports receives a special order for 10,000 basketballs at $30 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.77 per unit because of shipping costs but would not increase fixed costs and expenses.
Explanation / Answer
(a)
At 80% capacity utilization, total number of units produced is 119,400.
So, at 100% capacity utilization, total units
= 119,400/80%
= 149,250
So, idle capacity
= 149,250 - 119,400
= 29,850
Since the special order is well within the idle capacity of the organization, the order is execuatable. To check the acceptability of the order, we have to calculate the incremental profits/income from the order.
Current variable cost of goods sold for 119,400 units
= Cost of goods sold - Fixed Cost of goods sold
= $ 3,570,084 - $ 960,000
= $ 2,610,084
Variable Cost of goods sold per unit
= $ 2,610,084/119,400
= $ 21.86
Current variable Selling and Administrative expenses for 119,400 units
= Selling and administrative expenses - Fixed Selling and administrative expenses
= $ 487,442 - $ 257,000
= $ 230,442
Selling and administrative expenses per unit
= $ 230,442/119,400
= $ 1.93
Total Selling and administrative expenses per unit for special order
= Current Selling and administrative expenses per unit + Additional Selling and administrative expenses per unit
= $ 1.93 + $ 0.77
= $ 2.7
So, the below table shows the extra income generated from the special order of 10,000 units:
(b)
So, accepting the order will result in incremental income of $ 54,400. So, the order must be accepted.
Particulars RejectOrder $ Accept
Order $ Net Income
Increase
(Decrease) $ Revenues 0 300,000 300,000 Cost of goods sold 0 218,600 218,600 Selling and administrative expenses 0 27,000 27,000 Net income 0 54,400 54,400
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