Mervin Company produces circuit boards that sell for $8 per unit. It currently has capacity to produce 600,000 circuit boards per year but is selling 550,000 boards per year. Annual costs for the 550,000 circuit boards follow. Direct materials $ 825,000 Direct labor 1,100,000 Overhead . 1,375,000 Selling expenses 275,000 Administrative expenses . 550,000 Total costs and expenses $4,125,000 An overseas customer has offered to buy 50,000 circuit boards for $6 per unit. The customer is in a different market from Mervin’s regular customers and would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following: ∙ Direct materials and direct labor are 100% variable. ∙ Twenty percent of overhead is fixed at any production level from 550,000 units to 600,000 units; the remaining 80% of annual overhead costs are variable with respect to volume. ∙ Selling expenses are 40% variable with respect to number of units sold, and the other 60% of selling expenses are fixed. ∙ There will be an additional $0.20 per unit selling expense for this order. ∙ Administrative expenses would increase by a $700 fixed amount. Required 1. Prepare a three-column comparative income statement that reports the following: a. Annual income without the special order. b. Annual income from the special order. c. Combined annual income from normal business and the new business. 2. Should management accept the order? Analysis Component 3. What nonfinancial factors should Mervin consider? Explain. 4. Assume that the new customer wants to buy 100,000 units instead of 50,000 units—it will only buy 100,000 units or none and will not take a partial order. Without any computations, how does this change your answer in part 2?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Mervin Company produces circuit boards that sell for $8 per unit. It currently has capacity to produce
600,000 circuit boards per year but is selling 550,000 boards per year. Annual costs for the 550,000 circuit
boards follow.
Direct materials $ 825,000
Direct labor 1,100,000
Selling expenses 275,000
Administrative expenses . 550,000
Total costs and expenses $4,125,000 An overseas customer has offered to buy 50,000 circuit boards for $6 per unit. The customer is in a different
market from Mervin’s regular customers and would not affect regular sales. A study of its costs in
anticipation of this additional business reveals the following:
∙ Direct materials and direct labor are 100% variable.
∙ Twenty percent of overhead is fixed at any production level from 550,000 units to 600,000 units; the
remaining 80% of annual overhead costs are variable with respect to volume.
∙ Selling expenses are 40% variable with respect to number of units sold, and the other 60% of selling
expenses are fixed.
∙ There will be an additional $0.20 per unit selling expense for this order.
∙ Administrative expenses would increase by a $700 fixed amount.
Required
1. Prepare a three-column comparative income statement that reports the following:
a. Annual income without the special order.
b. Annual income from the special order.
c. Combined annual income from normal business and the new business.
2. Should management accept the order?
Analysis Component
3. What nonfinancial factors should Mervin consider? Explain.
4. Assume that the new customer wants to buy 100,000 units instead of 50,000 units—it will only buy
100,000 units or none and will not take a partial order. Without any computations, how does this
change your answer in part 2?
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