Reno Company manufactures toaster ovens. For the first 8 months of 2017, the com
ID: 2468325 • Letter: R
Question
Reno Company manufactures toaster ovens. For the first 8 months of 2017, the company reported the following operating results while operating at 95% of plant capacity: Cost of goods sold was 75% variable and 25% fixed; operating expenses were 75% variable and 25% fixed. In September, Reno Company receives a special order for 15,000 toasters at $7.60 each from El Camino Company of Tiajuana. Acceptance of the order would result in an additional $4,000 of shipping costs but no increase in fixed operating expenses. Prepare an incremental analysis for the special order. Should Reno Company accept the special order? Why or why not? Would your answer change if the order was for 20,000 ovens? Show computations.Explanation / Answer
a)
Total utilized capacity at 95% = 361,000 units.
So, 100% capacity = 361,000 / 0.95 = 380,000 units.
So, balance unutilized capacity = 380,000 - 361,000 = 19,000 units.
b)
The special order will generate additinal $9,875 in Net Income and so it should be accepted as the units required to be produced (15,000 units) is within the available idle capacity.
c)
If the quantity is 20,000 units, then the current idle capacity will not be sufficient to meet the requirement and since the current Net income is $3.60 per unit from normal units produced, it is not viable to produce the special order as the special order generates only $0.925 (2.725 - 1.80) per unit.
Gross Per Unit Sales Revenue 4512500 12.500 Cost of Goods Sold Variable 75% 1759875 4.875 Fixed 25% 586625 2346500 1.625 Gross Profit 2166000 6.000 Operating Expenses Variable 75% 649800 1.800 Fixed 25% 216600 866400 0.600 Net Income 1299600 3.600