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Incremental Analysis for Special Order

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Smooth Brew manufactures cappuccino makers. For the first eight months of 2006, the company reported the following operating results while operating at 80% of plant capacity:

Sales (120,000) $6,000,000
Cost of Goods Sold 3,600,000
Gross profit 2,400,000
Operating Expenses 1,800,000
Net income $ 600,000

An analysis of costs and expenses reveals that the variable cost of goods sold is $25 per unit and variable operating expenses are $10 per unit.

In September, Smooth Brew received a special order for 5,000 machines at $40 each from a major coffee shop franchise. Acceptance of the order would result in $2,000 of shipping costs but no increase in fixed expenses.
1. Prepare an incremental analysis for the special order.
2. Should Smooth Brew accept the special order? Justify your answer.

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1. Prepare an incremental analysis for the special order.

In order to do the incremental analysis, we consider only the variable costs, since the fixed costs would remain the same whether the order is accepted or not. We first check if there is spare ...

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The solution explains how to prepare an incremental analysis for a special order.

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Make incremental analysis for special order

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P7-1A Pro Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2008, the company reported the following operating results while operating at 90% of plant capacity and producing 112,500 units.
Sales $4,500,000
Cost of goods sold 3,600,000
Selling and administrative expenses 450,000
Net income $ 450,000
Fixed costs for the period were: cost of goods sold $1,080,000, and selling and administrative expenses $225,000.
In July, normally a slack manufacturing month, Pro Sports receives a special order for 10,000 basketballs at $28 each from the Italian Basketball Association (IBA). Acceptance of the order would increase variable selling and administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.

(a) Prepare an incremental analysis for the special order.
(b) Should Pro Sports Inc. accept the special order? Explain your answer.
(c) What is the minimum selling price on the special order to produce net income of $4.10 per ball?
(d) What nonfinancial factors should management consider in making its decision?
(a) NI increase $31,000

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