Chapter 23, Problem 1PSB

To determine

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
Overhead	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 $\left(\raisebox{1ex}{$384,000$}\!\left/ \!\raisebox{-1ex}{$300,000$}\right.\right)$	1.28
New business volume $\left(1.28\times 50,000\right)$	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 $\left(\raisebox{1ex}{$96,000$}\!\left/ \!\raisebox{-1ex}{$300,000$}\right.\right)$	0.32
Overtime per unit (50%)	0.16
New business direct labor cost per unit$\left(0.32+0.16\right)$	0.48
New business volume$\left(0.48\times 50,000\right)$	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 $\left(288,000-72,000\right)$	216,000
Units of output	300,000
Cost per unit$\left(\raisebox{1ex}{$216,000$}\!\left/ \!\raisebox{-1ex}{$300,000$}\right.\right)$	0.72
New business volume	50,000
New business variable overhead cost$\left(0.72\times 50,000\right)$	36,000

Table 4

Conclusion

Hence, the three-column comparative income statement is prepared as above.