Solutions 6
Ex. 168
Dingle Company produced and sold 50,000 units of product and is operating at 70%
of plant capacity. Unit information about its product is as follows:
Sales Price $70
Variable manufacturing cost $45
Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55
Profit per unit $15
The company received a proposal from a foreign company to buy 15,000 units of
Dingle Company’s product for $50 per unit. This is a one-time only order and
acceptance of this proposal will not affect the company’s regular sales. The president
of Dingle Company is reluctant to accept the proposal because he is concerned that
the company will lose money on the special order.
Instructions
Prepare a schedule reflecting an incremental analysis of this proposal and indicate the
effect the acceptance of this order might have on the company’s income.
Solution 168 (9–13 min.)
DINGLE COMPANY
Incremental Analysis
Proposal to buy 15,000 units at $50
Net
Income
Reject Order Accept Order Increase
(Decrease)
Revenues (15,000 × $50) $ -0- $750,000 $750,000
Costs (15,000 × $45) -0- (675,000) (675,000)
Net Income $ -0- $ 75,000 $ 75,000
Dingle Company would increase its income by $75,000 in accepting the special order.
Ex. 169
Eatman Company manufactures cappuccino makers. For the first eight months of
2008, the company reported the following operating results while operating at 80% of
plant capacity:
Sales (500,000 units) $90,000,000
Cost of goods sold 54,000,000
Gross profit 36,000,000
Operating expenses 24,000,000
Net income $12,000,000
An analysis of costs and expenses reveals that variable cost of goods sold is $95 per
unit and variable operating expenses are $35 per unit.
Ex. 169 (cont.)
In September, Eatman Company receives a special order for 30,000 machines at $135
each from a major coffee shop franchise. Acceptance of the order would result in
$10,000 of shipping costs but no increase in fixed expenses.
Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Eatman Company accept the special order? Justify your answer.
Solution 169 (12–17 min.)
(a) Net
Income
Reject Order Accept Order Increase
(Decrease)
Revenues $ -0- $4,050,000 $4,050,000
Cost of Goods Sold -0- 2,850,000* (2,850,000)
Operating Expense –0- 1,060,000** (1,060,000)
