Michael De Santa, Trevor Philips and Franklin Clinton were long-time friends. Th
ID: 2445350 • Letter: M
Question
Michael De Santa, Trevor Philips and Franklin Clinton were long-time friends. They attended Los Santos High School where they played football together and were heavily recruited by a wide variety of Division 1 schools. They stayed in touch while attending separate universities and after graduation they all eventually relocated back to the land of opportunity, the City of Los Santos. All three had an entrepreneurial spirit and together they built a strong highly diversified business, GTA International.
The City of Los Santos was going to be the host of the upcoming Super Bowl and business was booming. Trevor, the head of sales, recently received a phone call from Mr. Overcoat, President of a cement company. He was calling to inquire about the possibility of Los Santos Diversified providing some specialty binoculars for his customers who were going to attend the Super Bowl. Overcoat indicated he wanted to purchase 100 of the specialty commemorative binoculars and he would be willing to pay $250 each. The cement company would pick up the coolers upon completion of the order.
Trevor met with Luca Brotzie, Los Santos’ recently hired controller, to identify how much it would cost to produce the binoculars. After careful analysis, the following costs were identified:
Direct labor $60/unit Fixed ovhd (allocated) $1,000
Direct materials $80/unit Variable ovhd $20/unit
Los Santos would be able to have their factory modify an existing mold to produce the specialty binoculars. The cost of these modifications would be approximately $2,000.
REQUIREMENT A
1. Prepare an incremental analysis to determine whether Los Santos Diversified should accept this special order to produce the specialty binoculars
2. Assume that in order to supply the specialty binoculars for the cement company president, Mr. Overcoat Los Santos would need to restrict the sale of 100 of their high end binoculars due to high demand. These high end binoculars sale for $400 each, have variable costs of $160 and fixed overhead of $15 each. What is the impact on operating income if Los Santos fulfills the special order.
Explanation / Answer
1 Variable cost per unit $ Direct Material 60 Direct Labor 80 Direct Variable Cost 20 Total VC per unit 160 Variable cost in producing 100 specialty binoculars 16,000 Additional cost Cost of modifying the existing mold 2,000 TOTAL INCREMENTAL COST 18,000 TOTAL SALES 25,000 Operating Incremental Profit 7,000 NOTE: Since Fixed overhead is allocated amount, so not taken into account while calculating the incremental profit for specialty binoculars 2 Impact on Operating income for fulfilling the special order Contribution Loss per unit of sale of high end binoculars Sale Price 400 Variable cost 160 Contribution Loss per unit of sale of high end binoculars 240 Contribution Loss 24,000 Additional Modification cost 2,000 Loss on sale of specialty binoculars and restricting the sale of high end binoculars 26,000 Incremental Operating profit on specialty binoculars 7,000 Net increcmental loss on sale of specialty binoculars 19,000