XYZ manufactures tote bags. The forecasted income statement for the year before

Question

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. Rayco 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.

Explanation / Answer

Additional Order 50000 Bags Additional sales revenue 375000 Less: Cost of goods sold (3,200,000-1,200,000-500,000)/400,000*50,000 = 187,500 Increase in profit 375,000 - 187,500 = 25,000 = 187,500

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