Consider the following details of the income statement of the Black and Blue Pen
ID: 2505199 • Letter: C
Question
Consider the following details of the income statement of the Black and Blue Pen company (BBPC) for the year ended December 31, 2013. BBPC's fixed manufacturing costs were S3.000.000 and its fixed selling and administrative cost were S2.000,000. Sales commissions of 5% of sales are included in the selling and administrative expenses. BBPC had produced and sold 2 million pens There are no FG inventories at the beginning or end of the year. Near the end of the year. Pepsico offered to buy 200,000 pens on a special order. To fill the order, a special Pepsi logo would have to be added to each pen at an extra cost of &0.75 per pen. BBPC would avoid paying the sales commissions on this special order PepsiCo offered to pay $700,000 tor the 200,000 pens BBPC has enough unused capacity to execute Pepsicos order without incurring any additional fixed costa.Explanation / Answer
without BBPC for year end of 2013
income statement
sales 10,000,000
COGS 6,000,000
gross profit 4,000,000
SG&A expens 3,000,000
operating profit 1,000,000 ,
now 2million pens produced and sold, so 5 dollars per pen and 3 dollars to make a pen
pepsi co orders 200000 pens at $7,00,000 i.e, 3.5 dollar a pen
only cost incurred extra is COGS, which will be $6,00,000
and operating income will fall to $4,00,000
but on the delivery of order, we get $7,00,000
hence the special order can be taken and it also cuts down the tax to be paid, since tax is on the income after operating stage.