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31 July, 20:35

Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.

For the first 6 months of 2013, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold $4,200,000

Gross profit $2,800,000

Operating expenses $2,000,000

Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Required:

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg company accept the special order? Justify your answer.

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Answers (1)
  1. 31 July, 21:18
    0
    (a) Prepare an incremental analysis for the special order.

    Sales (600 mats * $45 each) $ 27,000

    Cost of Goods Sold (600 mats * $31.50) ($ 18,900)

    Gross Profit $ 8,100

    Operating Costs (600 mats * $14.00) ($ 8,400)

    Shipping Costs ($1,200)

    Net Income ($1,500)

    (b) Should Gregg company accept the special order?

    No

    Because the Order presents a financial disadvantage of $1,500.

    Explanation:

    Hint: Consider only the Incremental Costs and Revenues that relate to the 600 mat production

    Cost of Goods Sold

    Variable Cost per mat = ($4,200,000 * 75%) / 100,000

    = ($ 3,150,000) / 100,000

    = $31.50

    Operating Costs

    Variable Cost per mat = ($2,000,000 * 70%) / 100,000

    = $14.00
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