29 of 30 (o complete) GC8elco Manufacturing produces and sells oil filters for 3

ID: 2550909 • Letter: 2

Question

29 of 30 (o complete) GC8elco Manufacturing produces and sells oil filters for 320 each. A retale has offered to purchase 2 000 oa f ters f S1 32 pe f ter Of the l id anda ng cost pe Ste d S20 S 3 the isi idem u t complete. This special order would use manufacturing capacity that would otherwise be idle. No varlable nonmanufacturing costs would be incurred by the special order. Regular sales would not be affected by the special order Would you recommend that GCBelco accept the special order under these conditions? Complete the following incremental analysis to help you make your recommendation (Use parentheses or a minus sign to indicate a decrease in operating income from the special order) Total Order Incremental Analysis of Special Sales Order Decision Per Unit (25,000 units) Revenue from special order Less variable expense associated with the order Contribution margin Increase (decrease) in operating income from the special order oCBelcoa operating income I accept the special sales order because it will Choose from any list or enter any number in the input fields and then continue to the next question

Explanation / Answer

GC Belco

Incremental analysis:

Incremental analysis of special sales order decision

Per unit

Total order, 25,000 units

Sales revenue from special order

$1.32

$33,000

Less: Variable expenses associated with the order

$1.30

($32,500)

Contribution margin

$0.02

$500

less: cost of special stamping machine

($9,500)

Decrease in operating income from the special order

($9,000)

GC Belco should not accept the special order because it will decrease the operating income.

The fixed cost is of $0.90 ($2.20 - $1.30) is not relevant for the decision.

The company has idle capacity and the acceptance of special order does not affect the regular sales. So, the company can accept the special order if the decision earns a contribution margin.

Though the order earns a contribution margin of $500, the same is not adequate to absorb the cost of special stamping machine purchased exclusively for the special order. Hence, the company should not accept the special order.