Problem 1: Moonbeam Company manufactures toasters. For the first 8 months of 2017, the company reported the following operating results while operating at 75% of plant capacity:
Sales (350,500 units) $4,375,000
Cost of goods sold 2,607,000
Gross profit 1,768,000
Operating expenses 840,000
Net income $928,000
Cost of goods sold was 65% variable and 35% fixed; operating expenses were 75% variable and 25% fixed.
In September, Moonbeam Company receives a special order for 23, 100 toasters at $7.85 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,100 of shipping costs but no increase in fixed costs.
(a) Prepare an incremental analysis for the special order.
(b) Should Moonbeam Company accept the special order?
Problem 2: Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 56% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.72 and $4.86, respectively. Normal production is 25,800 curtain rods per year.
A supplier offers to make a pair of finials at a price of $13.31 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,100 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
(a) Prepare an incremental analysis to decide if Pottery Ranch should buy the finials.
(b) Should Pottery Ranch buy the finials?
(c) Would your answer be different in (b) if the productive capacity released by not making the finals could be used to produce income of $57,617?
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