Question

Lily Company manufactures toasters. For the first 8 months of 2020, the company reported the following operating results while operating at 75% of plant capacity: Sales (358,400 units) $4,375,000 Cost of goods sold 2,595,840 Gross profit 1,779,160 Operating expenses 837,760 Net income $941,400 Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Lily receives a special order for 21,700 toasters at $7.97 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $2,900 of shipping costs but no increase in fixed costs. (a) Prepare an incremental analysis for the special order. (Round computations for per unit cost to 2 decimal places, e.g. 15.25 and all other computations and final answers to the nearest whole dollar, e.g. 5,725. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Reject Order Accept Order Net Income Increase (Decrease) Revenues $ $ $ Cost of goods sold Operating expenses Net income $ $ $ (b) Should Lily accept the special order? Lily Company the special order.

Answer 1

Ans:

A. Cost of goods sold = $2,595840 x 70% = 1,817088/ 358,400 = $5.07 variable cost per unit

Operating expenses = $837,760 x 80% = 670208 / 358,400 = $1.87 variable cost per unit

Revenues(21700 x 7.97)	$172,949
Cost of Goods Sold(21700 x 5.07)	($110019)
Operating Expenses[(21700 x 1.87) + $2900]	($43479)
Net Income	$19,451

B. Lily Company should accept the special order. This is because the special order results in an increase in net income.

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