Shanghai Exports, LTD produces wall mounts for flat panel television sets. The f
ID: 2480459 • Letter: S
Question
Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2014 is as follows:
Additional Information (1) Of the production costs and selling expenses, $800,000 and $100,000, respectively, are fixed. (2) Shanghai Exports, LTD received a special order from a hospital supply company offering to buy 12,500 wall mounts for $30. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $32 to make a product to sell for $30."
Calculate the net benefit (cost) of accepting the special order.
Budgeted Income Statement
For the Year 2014 Sales ($ 44 per unit) $ 4,400,000 Cost of good sold ($ 32 per unit) (3,200,000) Gross profit 1,200,000 Selling expenses ($ 3 per unit) (300,000) Net income $ 900,000
Explanation / Answer
Shanghai Exports LTD should accept the order as the company would not incur the cost of 32 $ per unit.
From the question it is clear that the company is currently making 100000 units (4400000/44).
In this question the cost of 800000 $ of production cost is irrelevant as they are fixed and would be incurred irrespective of the quantities to be produced; so the production cost should be 3200000$-800000$= 2400000$ which comes to 24 $ per unit.
On the same lines it's been told that the selling expenses of 100000$ are fixed and would be incurred irrespective of the quantities to be produced; so the relevant selling expenses would be 300000-100000= 200000$ which comes to 2 $ per unit.
If the company accepts the special order the following would be the net benefit:
If the company accepts the order it will get profits of 4 $ per unit (50000/ 12500)
Sales (30 $ per unit) 375000 $ (12500 * 30) Cost of goods produced ( 24 $ per unit, calculated above) 300000 $ (12500 * 24) Gross Profit 75000 $ Selling Expenses ( 2 $ per unit, calculated above) 25000 $ Net Benefit 50000 $Related Questions
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