Costs of New Wholesaler's Business
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Problem 10-1A: Analysis of income effects of additional business L.O. C1, A1
Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of
underwater markers at $6 per package. Annual costs for the production and sale of this quantity are shown in
the table.
Direct materials $ 576,000
Direct labor 144,000
Overhead 320,000
Selling expenses 150,000
Administrative expenses 100,000
Total costs and expenses $1,290,000
A new wholesaler has offered to buy 50,000 packages for $5.20 each. These markers would be marketed
under the wholesaler's name and would not affect Jones Products' sales through its normal channels. A study
of the costs of this additional business reveals the following:
? Direct materials costs are 100% variable.
? Per unit direct labor costs for the additional units would be 50% higher than normal because their production
would require overtime pay at one-and-one-half times the usual labor rate.
? 25% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The
remaining 75% of the annual overhead cost is variable with volume.
? Accepting the new business would involve no additional selling expenses.
? Accepting the new business would increase administrative expenses by a $5,000 fixed amount.
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Solution Summary
This solution is comprised of a detailed explanation to prepare a three-column comparative income statement.
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Problem 10-1A: Analysis of income effects of additional business L.O. C1, A1
Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $6 per package. Annual costs for the production and sale of this quantity are shown in the table.
Direct materials $ 576,000 (576,000/400,000 = $1.44)
Direct labor 144,000 (144,000/400,000 = $0.36)
Overhead 320,000
(Fixed cost for overhead = 320,000 x 25% = 80,000;
variable cost for overhead = 240,000/400,000 = 0.60)
Selling expenses 150,000
Administrative expenses ...
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