Incremental Analysis
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If an incremental analysis looks like this:
Reject Accept Net Income
Order Order Increase(Decrease)
Revenues
Costs
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.
Instructions
(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 ...
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