ABC Electronics manufactures Blue-Ray drive, which has a fixed manufacturing
overhead budget for year 20X3 of $2,000,000. The sales of Blue-Ray drive are expected to be
500,000 units for the year. All variable manufacturing costs are expected to be $8 per unit.
The company has budgeted $5,000,000 for selling and administrative expenses and of which,
40% of them are variable expenses. The sale price of the Blue-Ray drive will be $30 each.
(1) Prepare a budgeted income statement for the year in contribution form ignoring income
(2) If a computer manufacturer offers to buy 200,000 units of Blue-Ray drive for $2 million
on a one-time special order. Assume that ABC Electronics 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 ABC Electronics only has extra capacity of 100,000 units
and the additional 100,000 units need to be subcontracted for $15 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?
The problem set deals with issues under accounting: Income statement, Contribution margin format.