Jones Products manufactures and sells to wholesalers approximately 400,000 packa
ID: 3199098 • Letter: J
Question
Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.93 per package. Annual costs for the production and sale of this quantity are shown in the table. Direct materials $ 512,000 Direct labor 128,000 Overhead 384,000 Selling expenses 160,000 Administrative expenses 107,000 Total costs and expenses $ 1,291,000 A new wholesaler has offered to buy 67,000 packages for $3.30 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional business reveals the following: • Direct materials costs are 100% variable. • Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate. • 20% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 80% of the annual overhead cost is variable with volume. • Accepting the new business would involve no additional selling expenses. • Accepting the new business would increase administrative expenses by a $4,000 fixed amount. Required: Complete the three-column comparative income statement that shows the following (Round your intermediate calculations and per unit cost answers to 3 decimals) 1. Annual operating income without the special order. 2. Annual operating income received from the new business only. 3. Combined annual operating income from normal business and the new business.
Per Unit Amounts Total Normal Volume New Business Normal Volume New Business Combined Sales $ Variable costs: 0.000 0.000 0 0 0 0 0 0 Fixed costs: 0 0 0 0 0 0 0 $0
Explanation / Answer
As per unit labour for the original packages was $0.32 which we otained by dividing $128000 by total packages that is 4,00000. Now the labour cost will increase by 50%. Therefore, labour cost per package will increase by $0.16. So, the cost per package will be $3.125+$0.16=$3.285. Further the administrative expense has increased by$4000. Per unit administrative expense will be $0.059. So, total cost will be $3.34 per package.
As total expenditure is given by $1291000 for 4,00,000 packages, so cost per package is given by $1291000 divided by 4,00,000=$3.22.
Selling price per package is $3.93. So profit per package is $3.93-$3.22=$0.71.
Therefore, profit is $0.71 multipliued by 4,00,000=$2,84,000.
Combined income from both business is $223780+$284000=5,07780.
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