An electronic company manufactures Graphics Card, which has a fixed manufacturin
ID: 451361 • Letter: A
Question
An electronic company manufactures Graphics Card, which has a fixed manufacturing overhead budget for year 20X5 of $1,800,000. The sales of Graphics Card are expected to be 500,000 units for the year. All variable manufacturing costs are expected to be $10 per unit. The company has budgeted $5,000,000 for selling and administrative expenses and of which, $2,100,000 of them are variable expenses. The sale price of the Graphics Card will be $30 each.
(1) Prepare a budgeted income statement for the year in contribution form ignoring income taxes.
(2) If a computer manufacturer offers to buy 160,000 units of Graphics Card for $2 million on a one-time special order. Assume that the company has enough manufacturing capacity for the order and there will be no selling and administrative cost incurred. However, a special commission of 5% of the sales of this special order will apply. Should the company take this special order?
(3) For the special order in (2), if the company only has extra capacity of 110,000 units and the additional 50,000 units need to be subcontracted for $20 each, should the company take this special order?
(4) For the special order in (3), what is the highest subcontract price that the company can accept so that the company will not lose money on this special order?
Explanation / Answer
Answer 1
Income Statement (Contribution Form)
Particulars
Amount ($)
Amount ($)
Sales
15,000,000
Less: Variable Expenses
Variable manufacturing cost
5,000,000
Variable expenses of selling and administration
2,100,000
7,100,000
Contribution Margin
7,900,000
Less: Fixed Expenses
Fixed manufacturing overheads
1,800,000
Fixed expenses of selling and administration
2,900,000
4,700,000
Net Income
3,200,000
Answer 2
Sales
2,000,000
Less
Variable manufacturing cost
1,600,000
Less
Fixed manufacturing overheads
1,800,000
Less
Special Commission
100,000
Loss
(1,500,000)
From this we can ascertain that it would not make sense in taking this order as it will be a loss to the organization.
Answer 3
Sales
2,000,000
Less
Variable manufacturing cost
1,100,000
Less
Subcontracting Cost
1,000,000
Less
Fixed manufacturing overheads
1,800,000
Less
Special Commission
100,000
Loss
(2,000,000)
Even with subcontracting the company should not take this special order
Answer 4
The company cannot afford to subcontract as at whatever rate it will subcontract it will lose money.
Particulars
Amount ($)
Amount ($)
Sales
15,000,000
Less: Variable Expenses
Variable manufacturing cost
5,000,000
Variable expenses of selling and administration
2,100,000
7,100,000
Contribution Margin
7,900,000
Less: Fixed Expenses
Fixed manufacturing overheads
1,800,000
Fixed expenses of selling and administration
2,900,000
4,700,000
Net Income
3,200,000
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