Question

Shanghai Exports, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2014 is as follows:

Shanghai Exports, LTD Budgeted Income Statement For the Year 2014
Sales ($ 44 per unit)	$ 4,400,000
Cost of good sold ($ 32 per unit)	(3,200,000)
Gross profit	1,200,000
Selling expenses ($ 3 per unit)	(300,000)
Net income	$ 900,000

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 $32 to make a product to sell for $30."

Calculate the net benefit (cost) of accepting the special order.

Answer 1

	Special order not accepted			Special order accepted
	Units (a)	Per unit (b)	Amount (a*b)	Units (a)	Per unit (b)	Amount (a*b)
Sales ($4,400,000/$44)	100,000	$44	$4,400,000	100,000	$44	$4,400,000
Sales due to special order				12,500	$30	$375,000
Total Net sales (w)	100,000		$4,400,000	112,500		$4,775,000
Less: Variable costs:
Cost of goods sold ($3,200,000 - $800,000 = $2,400,000/100,000)	100,000	$24	$2,400,000	112,500	$24	$2,700,000
Selling expenses ($300,000 - $100,000 = $200,000/100,000)	100,000	$2	$200,000	100,000	$2	$200,000
Total Variable cost (x)			$2,600,000			$2,900,000
Contribution Margin (y = w - x)			$1,800,000			$1,875,000
Less: Fixed Costs:
Cost of Goods Sold			$800,000			$800,000
Selling expenses			$100,000			$100,000
Total Fixed Costs (z)			$900,000			$900,000
Net Income (y - z)			$900,000			$975,000
Hence, the net benefit for accepting the special order is $75,000 ($975,000 - $900,000). Therefore, the special order can be accepted due to the positive net benefit.
Note: For variable selling expenses, the units are taken as 100,000 under special order accepted in order to get the same selling expenses because as per the given problem, it is stated that the selling expenses will remain the same even the special order is accepted.