Question

Pro Sports Inc. manufactures basketballs for professional basketball associations. For the first six months of 2020, the company reported the following operating results while operating at 90% of plant capacity:

		Amount		Per Unit
Sales		$4,500,000		$50.00
Cost of goods sold		3,150,000		35.00
Selling and administrative expenses		369,000		4.10
Net income		$981,000		$10.90

Fixed costs for the period were cost of goods sold of $900,000, and selling and administrative expenses of $162,000.

In July, normally a slack manufacturing month, Pro Sports receives a special order for 9,000 basketballs at $30 each from the Italian Basketball Association. Accepting the order would increase variable selling and administrative expenses by $0.75 per unit because of shipping costs, but it would not increase fixed costs and expenses.

(a)

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Prepare an incremental analysis for the special order. (Round per unit calculations to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 125.)

Incremental revenue				$
Incremental cost:
Variable COGS		$
Variable S & A
Additional S & A
Incremental income				$

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(b)

Should Pro Sports Inc. accept the special order?

Pro Sports Inc. should

acceptreject

the special order.

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Answer 1

Pro sports Inc.
	Accepted	Reject	Differential Effect on Income
Revenues ( 9000 * 30 )	2,70,000	0	2,70,000
Variable Cost
COGS ( 9000 * 25 )	2,25,000	0	-2,25,000
Selling and Adm. Exp.( 2.3 + 0.75 ) * 9000	27,450	0	-27,450
Total costs	2,52,450		-2,52,450
Income (loss)	17,550	0	17,550
Variable COGS = 3150000 - 900000 = $ 2250000
Var. COGS p.u = 2250000 / 90000 = $ 25
variable S and Adm. = 369000 - 162000 = $ 207000
Var. S and adm. P.u = 207000 / 90000 = $ 2.3
Note :- Fixed costs are irrelevant here as they are not changing with the approval or rejection of the order
b) The company should accept the order as it is generating revenue of $ 17550