Shanghai Exporters produces wall mounts for flat-panel television sets. The forecasted income...

Question:

Shanghai Exporters produces wall mounts for flat-panel television sets. The forecasted income statement for 2014 is as follows:

Unit Price 44
Revenue $ 4,400,000
Cost of Goods Sold (3,200,000)
Gross Profit $1,200,000
Selling Expenses (300,000)
Operating income $ 900,000

Additional Information:

1. Of the Cost of Goods Sold, $800,000 are fixed; of the selling expenses, $100,000 are fixed.

2. Shanghai Exporters received a special order offering to buy 12,500 wall mounts for $30; please note that the normal unit price is $44.

3. If this order is accepted, there will be no additional selling expenses, and there is sufficient capacity to fulfill this order.

4. The company general manager states, "We are not in the business of selling something for $30 when it costs us $32 to make it!"

a. How do you think the general manager came up with the figure of $32 'to make' this product? Is the general manager using correct analysis?

b. Should Shanghai Exporters accept this special order?

Variable Cost:

Variable cost per unit remains constant regardless of the level of activity. However, when computing for the total variable cost, the total activity will be multiplied to the variable cost per unit. In effect, total variable cost increases as the level of activity increases.

Answer and Explanation:

Unit Price 44
Revenue $ 4,400,000
Cost of Goods Sold (3,200,000)
Gross Profit $1,200,000
Selling Expenses (300,000)
Operating income $ 900,000

Additional Information:

1. Of the Cost of Goods Sold, $800,000 are fixed; of the selling expenses, $100,000 are fixed.

2. Shanghai Exporters received a special order offering to buy 12,500 wall mounts for $30; please note that the normal unit price is $44.

3. If this order is accepted, there will be no additional selling expenses, and there is sufficient capacity to fulfill this order.

4. The company general manager states, "We are not in the business of selling something for $30 when it costs us $32 to make it!"

a. How do you think the general manager came up with the figure of $32 'to make' this product? Is the general manager using correct analysis?

Revenue 4,400,000
Unit price 44
Units Sold 100,000


Cost of Goods Sold 3,200,000
Units Sold 100,000
Unit Cost of Sold Units 32


The entire cost of goods sold is used in computing for the cost of $32 per unit.


Such basis is incorrect because the other component of relevant cost, which includes the selling expense was not considered. Mostly, variable costs are considered as relevant. Also, considering that the company is operating within capacity, the fixed cost component of the cost of goods sold and selling expense should not be included in the computation as these are irrelevant cost.


b. Should Shanghai Exporters accept this special order?

Variable Component of Cost of Goods Sold 2,400,000
Variable Component of Selling Expense 200,000
Total Relevant Cost 2,600,000
Units 100,000
Relevant Cost per Unit 26


Considering that the relevant cost is only 26, the company should accept the customers offer of buying for $32 per unit.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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