Question

_{HW Chapter 25 Question 1: Deep Blue manufactures flotation vests in Charleston, South Carolina. Deep Blue's contribution margin income statement for the month ended October 31, 2014 contains the following data: Deep Blue Income Statement For the Month Ended October 31, 2014 32,000 Sales in Units $ Sales Revenue 448,000 Variable Costs: Manufacturing 96.000 112,000 Selling and Administrative 208,000 Total Variable Costs Contribution Margin 240,000 Fixed Costs: Manufacturing 123.000 88.000 Selling and Administrative 211,000 Total Fixed Costs 29,000 Operating Income Suppose Overtown wishes to buy 4,400 vests from Deep Blue. Acceptance of the order will not increase Deep Blue's variable selling and administrative expenses. The Deep Blue plant has enough unused capacity to manufacture the additional vests. Overtown has offered $7 per vest, which is below the normal sale price of $14 Requirements 1. Identity each cost in the income statement as either relevant or irrelevant to Deep Blue's decision. 2. Prepare a differential analysis to determine whether Deep Blue should accept this special sales order. 3. Identity long-term factors Deep Blue should consider in deciding whether to accept the special sales order}

Answer 1

Requirment 1

Variable Cost   
Manufacturing 96,000 ( Relevent )
Selling and administrative 112,000 ( Irrelevent )

Fixed Cost
   Manufacturing 123,000 ( Irrelevent )
Selling and administrative 88,000 (Irrelevent )

Requirment 2

	$
Expected increase in income in revenue ( 4,400 vest * $7 per vest )	30,800
Expected increase in Variable manufacturing ( 4,400 vest * $3 per vest)	(13,200)
	17,600

(Note- $96,000 variable manufacturing cost / 32,000 units = $3)

Deep blue should accept this order beacouse this order will increase operating income by $17,600. Variable selling and administrative cost and fixed cost do not change and therefore are not relevent.

Requirment 3

Considering this order will increase profite, Deep blue manager should consider that this sale will could affect regular sale in long run. If the regular customer found out about this order and will demand a lower price. Will this order customer come back again and again asking the same reducted price? will this order price will start a price war with the competitors?