25-34B LMS, Inc. manufactures stadium seat cushions. LMS\'s contribution margin

Question

25-34B LMS, Inc. manufactures stadium seat cushions. LMS's contribution margin income statement for the most recent month contains the fol- lowing data Sales in units Sales revenue Variable expenses: 31,000 $434,000 I 93,000 107,000 200.000 Manufacturing Marketing and administrative Total variable expensei Contribution margin 234,000E Fixed expenses Manufacruring Marketing and administrative Total fixed expenses 126,000 90,000 216,000 S 18.000 Operating income Underwood Company has offered $9 per unit for S,000 stadium seat cushions, which is below the normal sale price of $14. Acceptance of the order will not increase any of LMS's marketing and administrative expenses. The LMS plant has enough unused capaciry to manufacture the additional cushions. Requirements 1. Prepare an incremental analysis to determine the change in operating income if LMS accepts the special sales order. Should LMS accept the order? (pp. 1253-1254) 2. Identify long-term factors LMS should consider in deciding whether to accept the special sales order. (p. 1255)

Explanation / Answer

1) Incremental Analysis if LMS accepts the special sales order (Amount in $)

LMS should accept the order because there is an incremental operating income of $12,742 after accepting the special sales order.

2) In addition to considering the special order's increase on profits, LMS should consider whether the special order could affect regular sales in the long run. Will the regular customers find out about the special order and demand a lower price? Will the special order customer come back again and again, asking for the same reduced price? will the special order price start a price war with competitors?

Particulars Before special order (A) After special order (B) Difference (B-A) Sales in units 31,000 36,000 5,000 Sales Revenue 434,000 479,000 45,000 Less: Variable expenses (200,000) (232,258) (32,258) Contribution margin 234,000 246,742 12,742 Less: Fixed Expenses (216,000) (216,000) 0 Operating Income 18,000 30,742 12,742

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