Question

Jones Products manufactures and sells to wholesalers approximately 200,000 packages per year of underwater markers at $3.90 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials	$	240,000
Direct labor		60,000
Overhead		192,000
Selling expenses		80,000
Administrative expenses		53,000
Total costs and expenses	$	625,000

A new wholesaler has offered to buy 33,000 packages for $3.40 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’s sales through its normal channels. A study of the costs of this additional business reveals the following:

• Direct materials costs are 100% variable.
• Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate.
• 35 percent of the normal annual overhead costs are fixed at any production level from 150,000 to 300,000 units. The remaining 65% of the annual overhead cost is variable with volume.
• Accepting the new business would involve no additional selling expenses.
• Accepting the new business would increase administrative expenses by a $2,000 fixed amount.

Required:
Complete the three-column comparative income statement that shows the following (Round your intermediate calculations and per unit cost answers to 2 decimals.)

1. Annual operating income without the special order.
2. Annual operating income received from the new business only.
3. Combined annual operating income from normal business and the new business.

Answer 1

Direct material cost per package = Total direct material costs / 200,000 packages = $240,000 / 200,000 = $1.20

Direct labor cost per package = Total direct labor costs / 200,000 packages = $60,000 / 200,000 = $0.30

Direct labor cost for the special order = Direct labor cost per package + 50% = $0.30 + 50% = $0.45

Fixed overhead = 35% of $192,000 = $67,200.

Variable overhead = 65% of $192,000 = $124,800.

Variable overhead per package = $124,800 / 200,000 packages = $0.62 (rounded off to two decimal places)

S. No.	Particulars	Annual operating income without special order	Annual operating income with new business only	Combined Annual operating income
a.	Sales Revenue	$3.90 * 200,000 = $780,000	$3.40 * 33,000 = $112,200	$892,200
b.	Direct materials costs	$240,000	$1.20 * 33,000 = $39,600	$279,600
c.	Direct labor costs	$60,000	$0.45 * 33,000 = $14,850	$74,850
d.	Fixed overhead	$67,200	0	$67,200
e.	Variable overhead	$124,800	$0.62 * 33,000 = $20,460	$145,260
f.	Selling expenses	$80,000	0	$80,000
g.	Administrative expenses	$53,000	$2,000	$55,000
h.	Total Costs and expenses (b+c+d+e+f+g)	$625,000	$76,910	$701,910
i.	Annual operating income (a-h)	$155,000	$35,290	$190,290