Question

Camino Company manufactures designer to-go coffee cups. Each line of coffee cups is endorsed by a high-profile celebrity and designed with special elements selected by the celebrity. During the most recent year, Camino Company had the following operating results while operating at 85 percent (85,000 units) of its capacity:

Sales revenue	$	1,445,000
Cost of goods sold		637,500
Gross profit	$	807,500
Operating expenses		53,125
Net operating income	$	754,375

Camino’s cost of goods sold and operating expenses are 80 percent variable and 20 percent fixed. Camino has received an offer from a professional wrestling association to design a coffee cup endorsed by its biggest star and produce 14,000 cups for $11 each (total $154,000). These cups would be sold at wrestling matches throughout the United States. Acceptance of the order would require a $56,000 endorsement fee to the wrestling star, but no other increases in fixed operating expenses.

Required:
1. Complete the incremental analysis of the special order in the table provided below. (Enter per unit answers to 2 decimal places.)

	Per Cup	Total
Incremental Revenue
Less: Incremental Costs
Variable COGS
Variable Operating Expenses
Endorsement Fee
Incremental Profit

2. Should Camino accept this special order?

	No
	Yes

3. If Camino were operating at full capacity, what price would Camino require for the special order?

Price Per Cup:

Answer 1

1		Per Cup	Total
		(i)	(i) X 14000
	Incremental revenue	$                11.00	$       1,54,000
Less:	Incremental cost
	Variable COGS	$                  6.00	$           84,000
	Variable operating Expense	$                  0.50	$             7,000
	Endorsement fee	$                  4.00	$           56,000
	Incremental profit	$                  0.50	$             7,000
2	Yes
	As Incremental profit calculated above is positive it is beneficial to accept the special order
3	Price per cup:	$                      21
	Workings:		Fixed	Variable	Variable cost per unit
		(i)	(ii) = (i) X 20%	(iii) = (i) X 80%	(iii) / 85000 units
	Sales Revenue	$       14,45,000
	Cost of goods sold	$          6,37,500	$       1,27,500	$     5,10,000	$       6.00
	Gross Profit	$          8,07,500
	Operating expenses	$             53,125	$           10,625	$        42,500	$       0.50
	Net Operating Income	$          7,54,375
	Endorsement fee	$56000 / 14000 units
		$                  4.00
	Price per cup:
	If full capacity is utilized then Contribution margin lost is:
	Sales Revenue per unit ($1445000 / 85000 units)	$                      17
	Variable COGS	$                  6.00
	Variable operating Expense	$                  0.50
	Contribution margin lost	$                      11
Add:	Incremental cost per cup
	Variable COGS	$                  6.00
	Variable operating Expense	$                  0.50
	Endorsement fee	$                  4.00
	Price per cup	$                      21