Shanghai Exports, LTD produces wall mounts for flat panel television sets. The f

Question

Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2014 is as follows:

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.

Shanghai Exports, LTD
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

Loss on sale => 2 * 12500 => (25000 )

But benefit of selling Expenses => 100000

Net Benfit => $75000

So, its better to accept the order even if we are paying 32 and gettiing 30 but net benefit comes out to be $ 75000 and we are also having sufficient excess capacity to fill the order.

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