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 75 percent (60,000 units) of its capacity:

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 16,000 cups for $8 each (total $128,000). These cups would be sold at wrestling matches throughout the United States. Acceptance of the order would require a $48,000 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.)



2. Should Camino accept this special order?

3. If Camino were operating at full capacity, what price would Camino require for the special order?

Sales revenue $ 840,000 Cost of goods sold 322,500 Gross profit $ 517,500 Operating expenses 15,000 Net operating income $ 502,500

Explanation / Answer

1.

2. Camrino oshould acept this special offer.

3. If Camrino were operating at full capacity the price required by Camrino will be = $10.04.

Working:

STATEMENT OF INCREMENTAL ANALYSIS Current Proposed Incremental Per unit Total Activity - units 60000 76000 16000 Sales 14.00 840000 968000 128000 Variable costs: Cost of goods sold 4.30 258000 326800 68800 Operating Expenses 0.50 12000 38000 26000 Total Variable costs 4.80 270000 364800 94800 Contribution margin 9.20 570000 603200 33200 Fixed Expenses: Cost of goods sold 64500 64500 0 Operating Expenses 3000 3000 0 Total Fixed Expenses 67500 67500 0 Net operating Income 502500 535700 33200

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