Pro Sports Inc. manufactures basketballs for professional basketball association

Question

Pro Sports Inc. manufactures basketballs for professional basketball associations. For the first six months of 2016, the company reported the following operating results while operating at 90% of plant capacity:

Amount Sales $4,500.00 at $50.00 per unit

Cost of goods sold 3,150,000 at $35.00 per unit

Selling and administrative expenses 360,000 at $4.00 per unit

Net income 990,000 at $11.00 per unit

Fixed costs for the period were: cost of goods sold $900,000, and selling and administrative expenses $162,000.
In July, normally a slack manufacturing month, Pro Sports receives a special order for 9,000 basketballs at $30 each from the Italian Basketball Association. Accepting the order would increase variable selling and adminstrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.

Instructions:
a) Prepare an incremental analysis for the special order.
b) Should Pro Sports Inc. accept the special order? Explain your anser.
c) What is the minimum selling price on the special order to produce net income of $5.00 per ball?
d) What nonfinancial factors should management consider in making its decision?

Explanation / Answer

a)

b) Yes, Pro sports should accept the offer, as incremental cost is $27.7 whereas revenue will be $30 each unit. This will lead to $2.3 of extra contribution.

c) The minimum selling price to produce a net income of $ 5 = Inc cost + $5 = 27.7 + 5 = 32.7

d) The management needs to consider the production capacity, payment terms with the customer, credibility of the customer, etc.

Units produced = 4,500,000/ 50 = 90000 units Particulars Total Fixed Variable VC / unit
(Cost / 90000) Cost of goods sold       3,150,000        900,000        2,250,000                     25.00 Selling and admin          360,000        162,000            198,000                       2.20 Incremental cost / unit = Variable COGS / unit + Selling and admin / unit = 25 + 2.2 + 0.5 = 27.7

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.