Question

Current Designs 7-1 (Part 1) a

Current Designs faces a number of important decisions that require incremental analysis.

Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president of a brewing company. He was calling to inquire about the possibility of Current Designs producing “floating coolers” for a promotion his company was planning. These coolers resemble a kayak but are about one-third the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip. The company would be interested in purchasing 100 coolers for the upcoming summer. It is willing to pay $250 per cooler. The brewing company would pick up the coolers upon completion of the order.

Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce the coolers. After careful analysis, the following costs were identified.

Direct materials		$77	/unit		Variable overhead		$23	/unit
Direct labor		$61	/unit		Fixed overhead		$1,000

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these modifications would be approximately $2,000.

(a)

Prepare an incremental analysis to determine whether Current Designs should accept this special order to produce the coolers. (Enter decrease in net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).)

		Reject Order		Accept Order		Net Income Increase (Decrease)
Revenues		$		$		$
Costs
Net Income		$		$		$

Current Designs should

acceptreject

the order based on the incremental analysis.

Answer 1

	Reject Order	Accept Order	Net Income Increase (Decrease)
Revenues	0	25000	25000
Costs	0	-18100	-18100
Net Income	0	6900	6900
Current Designs should accept the order based on the incremental analysis.

Workings:
Revenues	25000	=250*100
Costs:
Direct materials	7700	=100*77
Direct labor	6100	=100*61
Variable overhead	2300	=100*23
Modifications cost	2000
Total Cost	18100

Alternatively costs under accept order can be written without a minus sign.