Question

Problem 23-1A Analysis of income effects of additional business LO A1

Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $3.87 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials	$	512,000
Direct labor		128,000
Overhead		384,000
Selling expenses		160,000
Administrative expenses		107,000
Total costs and expenses	$	1,291,000

A new wholesaler has offered to buy 67,000 packages for $3.37 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional business reveals the following:

Direct materials costs are 100% variable.

Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate.

25% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 75% of the annual overhead cost is variable with volume.

Accepting the new business would involve no additional selling expenses.

Accepting the new business would increase administrative expenses by a $3,000 fixed amount.

Required:
Complete the three-column comparative income statement that shows the following (Round your intermediate calculations and per unit cost answers to 3 decimals)

1. Annual operating income without the special order.
2. Annual operating income received from the new business only.
3. Combined annual operating income from normal business and the new business.

	Per Unit Amounts		Total
	Normal Volume	New Business	Normal Volume	New Business	Combined
Sales
Variable costs:
Fixed costs:

Answer 1

25% is fixed that mean = 384000*25/100 = 96000 is fixed cost.

75% is variable = 384000*75/100 = 288000. In question he given that variable cost varies from volume. so per unit cost is multiplied with volume of sales.