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Incremental analysis

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.
Make incremental analysis for special order and identify nonfinancial factors in the decision.

(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?

Solution Summary

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