Relevant costs:
Relevant costs are those costs in any managerial decision-making process that will influence the flow of capital in the future. Hence, such costs decide whether the decision is taken forward or rejected.
To prepare: A three-column comparative income statement to show the annual operating income without special order, annual operating income received from the new business only, and the combined annual operating income from normal business and the new business.

Explanation of Solution
Prepare the three-column comparative income statement as shown below.
Particulars | Normal volume | New business | Combined |
Sales | 1,200,000 | 172,000 | 1,372,000 |
Costs and expenses: | |||
Direct materials | 384,000 | 64,000 | 448,000 |
Direct labor | 96,000 | 24,000 | 120,000 |
288,000 | 36,000 | 324,000 | |
Selling expenses | 120,000 | - | 120,000 |
Administrative expenses | 80,000 | 4,000 | 84,000 |
Total costs and expenses | 968,000 | 128,000 | 1,096,000 |
Net income | 232,000 | 44,000 | 276,000 |
Table − 1
Working notes:
1. Calculation of new business direct material cost as shown below.
Particulars | Amount ($) |
Normal direct materials cost | 384,000 |
Units of output | 300,000 |
Cost per unit | 1.28 |
New business volume | 50,000 |
New business direct materials cost | 64,000 |
Table − 2
Therefore, the new business direct material cost is $64,000.
2. Calculation of new business direct labor cost.
Particulars | Amount ($) |
Normal direct labor cost | 96,000 |
Units of output | 300,000 |
Cost per unit | 0.32 |
Overtime per unit (50%) | 0.16 |
New business direct labor cost per unit | 0.48 |
New business volume | 50,000 |
New business direct labor cost | 24,000 |
Table 3
Therefore, the new business direct material labor cost is $24,000.
3. Calculation of new business variable overhead cost.
Particulars | Amount ($) |
Total overhead | 288,000 |
Fixed overhead (25%) | 72,000 |
Variable overhead | 216,000 |
Units of output | 300,000 |
Cost per unit | 0.72 |
New business volume | 50,000 |
New business variable overhead cost | 36,000 |
Table 4
Hence, the three-column comparative income statement is prepared as above.
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Chapter 10 Solutions
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