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Cost-Volume-Profit Analysis for Special Orders

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An electronic company manufactures wireless speakers. The company has a fixed manufacturing overhead budget of $2,000,000 for 2018. The sales of the speakers are predicted to be 200,000 units for the year. All variable manufacturing costs are expected to be $30 per unit. The selling and administrative expenses are budgeted for $3,000,000 and of which, $1,400,000 of them are variable expenses. The sale price of the wireless speakers will be $60 each. 

(1) Prepare a budgeted income statement for the year in contribution form ignoring income taxes. 
(2) If a computer manufacturer offers to buy 60,000 units of the speakers for $2.4 million on a one-time special order. Assume that the company has enough manufacturing capacity for the order and there will be no selling and administrative cost incurred. However, a special commission of 5% of the sales of this special order will apply. Should the company take this special order? 
(3) For the special order in (2), if the company only has extra capacity of 50,000 units and the additional 10,000 units need to be subcontracted for $65 each, should the company take this special order? 
(4) For the special order in (3), what is the highest subcontract price that the company can accept so that the company will not lose money on this special order? 

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Solution Summary

This solution illustrates how to prepare a contribution format budgeted income statement, how to compute the contribution on a special order with and without subcontracting, and how to find the highest price the company will pay for subcontracting.

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