Analyzing one company's make or buy and special order proposals OneCo is a retail organization in the Northeast that sells upscale clothing. Each year, store managers (in consultation with their supervisors) establish financial goals; a monthly reporting system captures actual performance. OneCo Inc. produces a single product. Cost per unit, based on the manufacture and sale of 10,000 units per month at full capacity, is shown below. Product costs Direct materials $4.00 Direct labor 1.30 Variable overhead 2.50 Fixed overhead 3.40 Sales commission 0.90 $12.10 The $0.90 sales commission is paid for every unit sold through regular channels. Market demand is such that OneCo is operating at full capacity, and the firm has found it can sell all it can produce at the market price of $16.50. Currently, OneCo is considering two separate proposals: · Gatsby, Inc. has offered to buy 1,000 units at $14.35 each. Sales commission would be $0.35 on this special order. · Zelda Productions, Inc. has offered to produce 1,000 units at a delivered cost to OneCo of $14.50 each.Note: Do not use negative signs with any of your answers. a. What would be the effect on OneCo's operating income if it accepts the proposal from Zelda, but rejects the proposal from Gatsby? Operating income would _______ by _______. b. What would be the effect on OneCo's operating income if it accepts both proposals?Operating income would _______by _______. .
Analyzing one company's make or buy and special order proposals
OneCo is a retail organization in the Northeast that sells upscale clothing. Each year, store managers (in consultation with their supervisors) establish financial goals; a monthly reporting system captures actual performance.
OneCo Inc. produces a single product. Cost per unit, based on the manufacture and sale of 10,000 units per month at full capacity, is shown below.
| Product costs | |
|---|---|
| Direct materials | $4.00 |
| Direct labor | 1.30 |
| Variable overhead | 2.50 |
| Fixed overhead | 3.40 |
| Sales commission | 0.90 |
| $12.10 |
The $0.90 sales commission is paid for every unit sold through regular channels. Market demand is such that OneCo is operating at full capacity, and the firm has found it can sell all it can produce at the market price of $16.50.
Currently, OneCo is considering two separate proposals:
· Gatsby, Inc. has offered to buy 1,000 units at $14.35 each. Sales commission would be $0.35 on this special order.
· Zelda Productions, Inc. has offered to produce 1,000 units at a delivered cost to OneCo of $14.50 each.
Note: Do not use negative signs with any of your answers.
a. What would be the effect on OneCo's operating income if it accepts the proposal from Zelda, but rejects the proposal from Gatsby? Operating income would _______ by _______.
b. What would be the effect on OneCo's operating income if it accepts both proposals?
Operating income would _______by _______.
.
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