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    Incremental Analysis

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    If an incremental analysis looks like this:
    Reject Accept Net Income
    Order Order Increase(Decrease)
    Net Income

    How do I go about solving this problem? Do I need to worry about Margin per unit/dollars?

    Carter Company manufactures cappuccino makers. For the first eight months of 2004 the company reported the following operating results while operating at 80% of plant capacity:

    Sales (500,000 units) $75,000,000
    Cost of goods sold 45,000,000
    Gross profit 30,000,000
    Operating expenses 24,000,000
    Net income $ 6,000,000

    An analysis of costs and expenses reveals that variable cost of goods sold is $80 per unit and variable operating expenses are $30 per unit.

    In September, Carter Company receives a special order for 40,000 machines at $120 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.

    (a) Prepare an incremental analysis for the special order.
    (b) Should Carter Company accept the special order? Justify your answer.

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    Solution Preview

    Variable Cost = $80+$30=$110
    Total Fixed Cost=$10,000
    Total Incremental Cost = $110*40000+10000 =4410000

    Incremental ...