Question

The Sticky Gum Company has received a special order of 12,000 packages of mint flavored

chewing gum to be shipped by month end at a selling price of $14 each. The company has a

production capacity of 180,000 mint gum packages a month with total fixed production costs

of $288,000. Presently, the

Fixed Production Costs	$3.60
Variable Selling Expenses	$ 2.00

Variable Production Costs

$9.20

company has demand of 170,000 mint gum packages a month at a

selling price of $22 each. For the normal order, the cost of 1 mint gum package is

If, the special order is accepted, the company will not incur any selling expense; however, it

will incur shipping costs of $0.60 per unit. Total Fixed Production Costs would not be affected

by the special order. Should we accept the special order? What would the change in monthly

net operating income? If, the company accepted the special order?

                                                                                                                                              

Answer 1

Excess capacity available= 180,000 mint gum packages - 170,000 mint gum packages = 10,000 mint gum packages

So we have to loose the normal sales 0f 12000 - 10000 = 2000 mint gum packages.

Loss in CM of 2000 mint gum packages :- 2000 * ( 22 - 2 - 9.20 ) = $ 21600

Increase in CM from accepting the special order = 12000 * ( 14 - 9.2 - 0.6 ) = $ 50400

So, there is an increase in income by ( 50400 - 21600 ) $ 28800.

The order should be accepted.

Should we accept the special order? Yes

What would the change in monthly

net operating income? If, the company accepted the special order?increase in income by ( 50400 - 21600 ) $ 28800.