Question

Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for...

Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2012 is as follows:

Shanghai Exports, LTD
Bugdgeted Income Statement
For the Year 2012
Sales ($ 44 per unit) $ 4,400,000
Cost of good sold ($ 32 per unit) (3,600,000)
Gross profit 800,000
Selling expenses ($ 3 per unit) (300,000)
Net income $ 500,000


Additional Information (1) Of the production costs and selling expenses, $800,000 and $100,000, respectively, are fixed. (2) Shanghai Exports, LTD received a special order from a hospital supply company offering to buy 12,500 wall mounts for $30. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $36 to make a product to sell for $30."

Question: Do you think the company should accept the special order? Should the decision be based only on the profitability of the sale, or are there other issues that Soni should consider? Explain.

Business   Accounting   
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Answer #1

If Special Order is Accepted

Additional sales-$30*12500=$375000

(-) COGS-$28(see note)*12500=$350,000

Gross Profit=$25,000

(-)selling expenses-nil (given no add selling expenses would be incurred)

so,total benefit to the company $25,000

yes,the company should accept the special order because net benefit to the company will increase by $25,000.

the decision should be based on the relevant costing only and we will make use of cost accounting principles in this.

Note-we have ignored the fixed cost completely because the fixed cost will be incurred even if the order is not accepted so it is not a relevant cost while making a decision regarding a special order.

no of units-$ 4,400,000/$ 44 per unit

                 -$1,00,000

COGS(Ignoring the fixed part as it is irrelevant)-$3,600,000-$800,000

                                                                            -$2,800,000

so per unit-$2,800,000/1,00,000

                 -$28 per unit

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