Problem 26-1A (Part Level Submission) ShurShot Sports Inc. manufactures basketba

Question

Problem 26-1A (Part Level Submission) ShurShot Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2014, the company reported the following operating results while operating at 80% of plant capacity and producing 127,920 units. Amount $6,396,000 3,908,856 Sales revenue Cost of goods sold Selling and administrative expenses Net income 399,530 $2,087,614 Fixed costs for the period were cost of goods sold $960,300, and selling and administrative expenses $223,000. In July, normally a slack manufacturing month, ShurShot Sports receives a special order for 12,100 basketballs at $25 each from the Greek Basketball Association (GBA) Acceptance of the order would increase variable selling and administrative expenses $0.33 per unit because of shipping costs but would not increase fixed costs and expenses

Explanation / Answer

Solution:

First of all we need to find out the variable cost associated with the manufacturing of product:

Variable Expenses

Fixed Expenses

Total

Cost of Goods Sold

$2,948,556

$960,300

$3,908,856

Selling and administrative expenses

$176,530

$223,000

$399,530

Calculation of Per Unit Variable Cost for manufacturing of product

Variable Expenses

Per Unit

Cost of Goods Sold

$2,948,556

$23.05

(2,948,556 / 127,920)

Selling and administrative expenses

$176,530

$1.38

(176,530 / 127,920)

Total Variable Cost Per Unit

24.43

Since fixed cost will remain unchanged, fixed cost is irrelevant for decision making purpose. The relevant cost for this purpose is variable cost.

Calculation of minimum selling price on the special order to produce net income of $5.82 per ball

Per Unit

Variable Cost of Goods Sold

$23.05

Variable Selling and administrative expenses

$1.38

Additional variable selling and administrative cost towards shipping cost

$0.33

Total Variable Cost per unit

$24.76

Add: Desired Net Income per unit

$5.82

Minimum Selling Price per unit (24.76 + 5.82)

$30.58

Variable Expenses

Fixed Expenses

Total

Cost of Goods Sold

$2,948,556

$960,300

$3,908,856

Selling and administrative expenses

$176,530

$223,000

$399,530

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