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Incremental Analysis for Special Order

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.

Solution Preview

Please see the attached file.

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 ...

Solution Summary

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

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