XYZ manufactures tote bags. The forecasted income statement for the year before
ID: 2484906 • Letter: X
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
Incremental analysis
Calculation of amount operating income that would increase or decrease as a result of accepting the special order:
Before Accepting offer
After Accepting offer
Increase (Decrease) in Operating income
Sales
$ 4,000,000
$ 4,375,000
$ 375,000
(400000 units *$10)
(400000 units *$10) + (50000 Units * $7.50)
Variable Manufacturing cost of goods sold
$ 2,000,000
$ 2,250,000
$ (250,000)
(3200000-1200000)
($2000000/400000 Units )*450000 Units
Fixed Manufacturing cost of goods sold
$ 1,200,000
$ 1,200,000
$ -
Variable Selling expenses
$ 200,000
$ 225,000
$ (25,000)
(300000-100000)
($200000/400000 Units )*450000 Units
Fixed Selling expenses
$ 100,000
$ 100,000
$ -
Operating income
$ 500,000
$ 600,000
$ 100,000
Hence accepting the offer would increase the operating income by $100,000.
Incremental analysis
Calculation of amount operating income that would increase or decrease as a result of accepting the special order:
Before Accepting offer
After Accepting offer
Increase (Decrease) in Operating income
Sales
$ 4,000,000
$ 4,375,000
$ 375,000
(400000 units *$10)
(400000 units *$10) + (50000 Units * $7.50)
Variable Manufacturing cost of goods sold
$ 2,000,000
$ 2,250,000
$ (250,000)
(3200000-1200000)
($2000000/400000 Units )*450000 Units
Fixed Manufacturing cost of goods sold
$ 1,200,000
$ 1,200,000
$ -
Variable Selling expenses
$ 200,000
$ 225,000
$ (25,000)
(300000-100000)
($200000/400000 Units )*450000 Units
Fixed Selling expenses
$ 100,000
$ 100,000
$ -
Operating income
$ 500,000
$ 600,000
$ 100,000
Hence accepting the offer would increase the operating income by $100,000.
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