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    20 May CA

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    ALI HAMEED
    The Clean-it Company produces cleaning kits for shotguns with an annual production capacity of 500,000 kits. Their projected income statement shows net income of $390,000. A large discount chain has offered to purchase 30,000 kits at $6 each. Accepting this special order would increase net income by $90,000. The lowest price the firm could accept to earn their target annual net income of $480,000 is $6.30 per kit. Dixon Company normally produces 100,000 units of part 347 annually at a total cost of $640 per 100 units. Cext Company has offered to supply the 100,000 units for $600 per 100 units. If Dixon accepts, they could save

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    20 May CA

    Uploaded by

    ALI HAMEED
    34 views2 pages
    The Clean-it Company produces cleaning kits for shotguns with an annual production capacity of 500,000 kits. Their projected income statement shows net income of $390,000. A large discount chain has offered to purchase 30,000 kits at $6 each. Accepting this special order would increase net income by $90,000. The lowest price the firm could accept to earn their target annual net income of $480,000 is $6.30 per kit. Dixon Company normally produces 100,000 units of part 347 annually at a total cost of $640 per 100 units. Cext Company has offered to supply the 100,000 units for $600 per 100 units. If Dixon accepts, they could save

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    The Clean-it Company produces cleaning kits for shotguns with an annual production capacity of 500,000 kits. Their projected income statement shows net income of $390,000. A large discount chain has offered to purchase 30,000 kits at $6 each. Accepting this special order would increase net income by $90,000. The lowest price the firm could accept to earn their target annual net income of $480,000 is $6.30 per kit. Dixon Company normally produces 100,000 units of part 347 annually at a total cost of $640 per 100 units. Cext Company has offered to supply the 100,000 units for $600 per 100 units. If Dixon accepts, they could save

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    34 views2 pages

    20 May CA

    Uploaded by

    ALI HAMEED
    The Clean-it Company produces cleaning kits for shotguns with an annual production capacity of 500,000 kits. Their projected income statement shows net income of $390,000. A large discount chain has offered to purchase 30,000 kits at $6 each. Accepting this special order would increase net income by $90,000. The lowest price the firm could accept to earn their target annual net income of $480,000 is $6.30 per kit. Dixon Company normally produces 100,000 units of part 347 annually at a total cost of $640 per 100 units. Cext Company has offered to supply the 100,000 units for $600 per 100 units. If Dixon accepts, they could save

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    © All Rights Reserved
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    of 2

    Q No.

    1 Evaluating a Special Order


    Clean-it Company produces cleaning kits for shotguns. The production capacity available will enable the
    firm to produce 500,000 kits annually. A projected income statement for next year shows

    Sales (460,000 kits) $4,600,000


    Costs of goods sold 2,960,000
    Gross profit 1,640,000
    Selling and administrative expenses 1,250,000
    Net income $ 390,000

    Fixed manufacturing overhead costs included in the cost of goods sold are $ 1,120,000. A 10% sales
    commission is paid to sales representatives for each kit sold. The purchasing department of a large
    discount chain has offered to purchase 30,000 kits at $6 each. The Clean-it Company sales manager’s
    initial response is to refuse the offer because he concludes that the $6 price is below the firm’s average
    cost 2,960,000/460,000. The sales commission would not be paid on the special order.

    Required:
    A. Should the special offer be accepted? What would be the impact on net income?
    B. Assume that the offer was for 50,000 kits. Should it be accepted? Show your
    calculations.
    C. Ignore part B. What is the lowest price the firm could accept if it wants to earn annual
    net income of $480,000?

    Dixon Company manufactures part 347 for use in one of its main products.
    Normal annual production for part 347 is 100,000 units. The costs per 100 units is as follows

    Direct material………………... $260


    Direct labor………………....... 100
    Manufacturing overhead:
    Variable ………………............ 120
    Fixed ………………................ 160
    Total costs per 100 units…….. $640

    Cext Company has offered to sell Dixon all 100,000 units it will need during the coming year for
    $600 per 100units. If Dixon accepts the often from Cext, the facilities used to manufacture part
    347 could be used in the production of part 483. This change would save Dixon $90,000 in
    relevant costs. Also, a $100,000 cost item included in the fixed factory overhead that is
    specifically related to part 347 would be eliminated. Should Dixon Company accept the offer
    from Cext Company?

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