a Increased revenue attributable to the special order Increased variable costs attributable to the special order (Calculate the per unit variable cost first, the the total) Per unit variable cost Units in special order Total variable costs Contribution margin Incremental fixed costs Increase in net income before taxes Should the special order be accepted? Why, or why not? Meeting a target profit: b Adjusted unit variable cost (w/reduced commission) Total adjusted variable costs Total increase in fixed costs Desired net income before income before income taxes 39,600 Total cost (excluding commission) plus desired net income before income $ 39,600 ($501,600 0.95) Minimum price per unit
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
I initially did this using a differential analysis, but it seems like the project wants me to do it a different way (see the attached worksheet). What am I supposed to enter in the blue boxes? I can understand why the special order should be accepted or not. The minimum price per unit I got to was $5.87. I don't know how to do part a) or b) according the the worksheet attached otherwise. Can you show the formulas too to see how to do it?
The following total cost data are for Ralston Manufacturing Company, which has a normal capacity per period of 400,000 units of product that sell for $18 each. For the foreseeable future, regular sales volume should continue at normal capacity of production.
| Direct Materials |
$1,720,000 |
| Direct Labor | 1,120,000 |
| Variable |
560,000 |
| Fixed overhead (Note 1) | 880,000 |
| Selling expenses (Note 2) | 720,000 |
| Administrative expense (fixed) | 200,000 |
| 5,200,000 |
Notes:
1. Beyond normal capacity, fixed overhead cost increases $30,000 for each 20,000 units or fraction thereof until a max capacity of 640,000 units is reached.
2. Selling expenses are a 10% sales commission. Ralston pays only one-half of the regular sales commission rates on any sale of 20,000 or more units.
Ralston's sales manager has received a special order for 48,000 units from a large discount chain a special price of $16 each, FOB factory. The controller's office has furnished the following additional cost data related to the special order:
1. Changes in the product's construction will reduce dire materials $1.80 per unit
2. Special processing will add 25% to the per-unit direct labor costs.
3. Variable overhead will continue at the same proportion of direct labor costs.
4. Other costs should not be affected
The two questions are the following:
a. Present an analysis supporting a decision to accept or reject the special order. Assume Ralston's regular sales are not affected by this special order.
b. What is the lowest unit sales price Ralston could receive and still make a before-tax profit of $39,600 on the special order?
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