Camino Company manufactures designer to-go coffee cups. Each line of coffee cups

Question

Camino Company manufactures designer to-go coffee cups. Each line of coffee cups is endorsed by a high-profile celebrity and designed with special elements selected by the celebrity. During the most recent year, Camino Company had the following operating results while operating at 70 percent (70,000 units) of its capacity: Sales revenue Cost of goods sold Gross profit $840,000 332,500 $507,500 26,250 Net operating income Camino's cost of goods sold and operating expenses are 80 percent variable and 20 percent fixed. Camino has received an offer from a professional wrestling association to design a coffee cup endorsed by its biggest star and produce 22,000 cups for $9 each (total $198,000). These cups would be sold at wrestling matches throughout the United States. Acceptance of the order would require a $44,000 endorsement fee to the wrestling star, but no other increases in fixed operating expenses. Required 1. Complete the incremental analysis of the special order in the table provided below. (Enter per unit answers to 2 decimal places.) Per cup Total Less: Incremental Costs Variable COGS Variable Operating Expenses Incremental Profit 2. Should Camino accept this special order? Yes No 3. If Camino were operating at full capacity, what price would Camino require for the special order? per Cup

Explanation / Answer

Ans)

1) Incremental analysis of the special order

Variable COGS (332500 X80% = 266000)

266000 / 70,000units = 3.8

Variable operating expenses (26250 X 80% = 21000)

21000 / 70,000 = 0.3

2) Camino should accept the special order as it involves incremental profit of 63,800

3) Price for the special order = 3.8 + 0.3 + 2 = 6.1

Per cup Total Incremental revenue (22000 X 9) 9 198,000 Less: Incremental costs

Variable COGS (332500 X80% = 266000)

266000 / 70,000units = 3.8

(3.8) (83600)

Variable operating expenses (26250 X 80% = 21000)

21000 / 70,000 = 0.3

(0.3) (6600) Endorsement fee (44000 / 22000) (2) (44000) Incremental profit 2.9 63800

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