Special Order:
Consider the following details of the income statement of the Manteray Pen Company (MPC for the year ended December 31, 20X4.
Sales $10,000,000
Less cost of goods sold 6,500,000
Gross margin or gross profit 3,500,000
less selling and administrative expenses 2,800,000
Operating Income 700,000
MPC's fixed manufacturing costs were $2.9 million and its fixed selling and administrative costs were $2.0 million. Sales commmissions of 3% of sales are included in selling and administrative expenses.
The division had sold 2 million pens. Near the end of the year. Pizza Hut offered to buy 150,000 pens on a special order. To fill the order, a special Pizza Hut logo would have to be added to each pen. Pizza Hut intended to use the pens in special promotions in an eastern city during early 20X5.
Even though MPC had some idle plant capacity, the president rejected the Pizza Hut offer of $660,000 for the 150,000 pens. He said, The prizza Hut offer is too low. We'd avoid paying sales commissions, but we'd have to incur an extra cost of $.20 per pen to add the logo. If MPC sells below its regular selling prices, it will begin a chain reaction of competitors'price cutting and of customers wanting special deals. I believe in pricing at no lower than 8% above our full costs of $9,300,000/2,000,000=$4.65 per unit plus the extra $.20 per pen less the savings in commissions.
1) Using the contribution margin technique. prepare an analysis. Use four columns: without the special order, the effect of the special order(one column total and one column per unit) and totals with the special order.
2) By what percentage would operating income increase or decrease if the order had been accepted? Do you agree with the prresident's decision? why?